GEO GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-14260

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THE GEO GROUP, INC.
(Exact name of registrant as specified in its charter)
Formerly known as Wackenhut Corrections Corporation

FLORIDA 65-0043078
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

ONE PARK PLACE, SUITE 700, 621 NORTHWEST 53RD STREET 33487-8242
BOCA RATON, FLORIDA (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE):
(561) 893-0101

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of the 9,332,552 shares of common stock held by
non-affiliates of the registrant as of June 30, 2003 (based on the last reported
sales price of such stock on the New York Stock Exchange on such date of $13.71
per share) was approximately $127,949,287. As of March 8, 2004, the registrant
had 9,332,552 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain Portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 for its 2004 annual
meeting of shareholders are incorporated by reference into Part III of this
report.
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TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

As used in this report, the terms "we," "us," "our," "GEO" and the
"Company" refer to The GEO Group, Inc., its consolidated subsidiaries and its
unconsolidated affiliates, unless otherwise expressly stated or the context
otherwise requires.

GENERAL

We are a leading provider of government-outsourced services specializing in
the management of correctional, detention and mental health facilities. We
believe that we are the second largest operator of privatized correctional and
detention facilities in the world, with operations located in the United States,
Australia, New Zealand, South Africa and Canada. We believe that we have a
leading share of the privatized correctional and detention facilities management
services market for the states of California, Florida and Texas, the three U.S.
states with the largest inmate populations. We are also a leading provider of
correctional services to the United States Marshals Service, the Federal Bureau
of Prisons and the Department of Homeland Security Bureau of Immigrations and
Customs Enforcement. As of December 28, 2003, we operated a total of 41
correctional, detention and mental health facilities and had over 36,000 beds
under management or for which we had been awarded contracts. We maintained an
average facility occupancy rate of 100% for the fiscal year ended December 28,
2003. For the fiscal year ended December 28, 2003, we had consolidated revenues
of $617.5 million and consolidated operating income of $31.8 million.

Our correctional and detention management services involve the provision of
security, administrative, rehabilitation, education, health and food services,
primarily at adult male correctional and detention facilities. We also develop
new facilities based on contract awards, using our project development expertise
and experience to design, construct and finance what we believe are
state-of-the-art facilities that maximize security and efficiency. Through these
management and development services, we believe that we achieve significant cost
savings in comparison to public sector costs, providing substantial
privatization benefits to our government customers.

Under our correctional facility management services contracts, most of our
government customers pay us on a per inmate per diem basis, with some of these
contracts providing for minimum guaranteed payments regardless of actual
occupancy levels. Certain of our contracts also provide for fixed fee payments.
Generally, our management services contracts have rate adjustments for increased
costs due to inflation.

Our mental health facilities management services primarily involve the
provision of acute mental health and related administrative services to mentally
ill patients that have been placed under public sector supervision and care. At
these mental health facilities, we employ psychiatrists, physicians, nurses,
counselors, social workers and other trained personnel to deliver active
psychiatric treatment which is designed to diagnose, treat and rehabilitate
patients for community reintegration. Since 1998, we have operated what we
believe is the only fully privatized state mental health facility in the U.S. at
South Florida State Hospital. In December 2000, we completed the design and
construction of a new 325-bed facility that replaced the original facility. We
are paid a fixed monthly fee for the provision of services at this facility.

COMPETITIVE STRENGTHS

EXPERIENCED INDUSTRY LEADER

We are a global provider of privatized correctional and detention services
with operations in the United States, Australia, New Zealand, South Africa and
Canada. Additionally, we maintained operations in the United Kingdom through a
joint venture for more than ten years until the sale of our interest in the
joint venture in July 2003. We operate a broad range of correctional and
detention facilities including

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maximum, medium and minimum security prisons, immigration detention centers,
minimum security detention centers and mental health facilities. Since our
founding in 1984, we believe that we have established a strong reputation among
federal, state, and local authorities as a highly effective operator of secure,
well-managed facilities. We believe that our long operating history and
reputation have earned us credibility with both existing and prospective clients
when bidding on new facility management contracts or renewing existing
contracts.

REGIONAL OPERATING STRUCTURE

We operate three regional U.S. offices and two international offices that
provide administrative oversight and support to our correctional and detention
facilities and allow us to maintain close relationships with our clients and
suppliers. Each of our three regional U.S. offices is responsible for the
facilities located within a defined geographic area. The regional offices
perform regular internal audits of the facilities in order to ensure continued
compliance with the underlying contracts, applicable accreditation standards,
governmental regulations and our internal policies and procedures. We believe
that our regional operating structure differentiates us from our competitors and
allows us to deliver highly responsive customer service. We also believe that
our regional operating structure facilitates our integration into the local
communities in which we operate and provides us with the ability to market our
services more effectively.

LONG TERM RELATIONSHIPS WITH HIGH-QUALITY GOVERNMENT CUSTOMERS

We have developed long term relationships with our government customers and
have been successful at retaining our facility management contracts. We have
provided correctional and detention management services to the United States
Federal Government for 17 years, the State of California for 15 years, the State
of Texas for 15 years, various Australian state government entities for 12 years
and the State of Florida for 9 years. This customer base accounted for
approximately 73.6% of our consolidated revenues for the fiscal year ended
December 28, 2003. Our strong operating track record has enabled us to achieve a
high renewal rate for contracts. Our government customers typically satisfy
their payment obligations to us through budgetary appropriations. We believe
this provides us with a stable and predictable source of revenues and cash flow.

FULL-SERVICE FACILITY DEVELOPER

We believe that our ability to provide comprehensive facility development
and design services enables us to retain existing customers seeking to update
their facilities and to attract new customers by demonstrating the benefits of
privatization. We have developed an expertise in the design, construction and
financing of high quality correctional, detention and mental health facilities.
Since 1986, we have designed, developed or renovated 38 correctional, detention
and mental health facilities. We have provided or facilitated the financing of
these facilities through a variety of means, including, public-private financing
initiatives, third party sale-leasebacks, self-financings and tax-exempt,
non-recourse revenue bonds. We believe that our in-house team of architects
provides us with the capability to produce secure and cost-effective design
solutions that reduce personnel needs and facility operating expenses.

EXPERIENCED, PROVEN SENIOR MANAGEMENT TEAM

Our top three senior executives have over 45 years of combined industry
experience, have worked together at our company for more than 12 years and have
established a track record of growth and profitability. Under their leadership,
our annual consolidated revenues have grown from $40.0 million in 1991 to $617.5
million in 2003. Our Chief Executive Officer, George C. Zoley, was one of the
pioneers of the industry, having developed and opened what we believe was one of
the first privatized detention facilities in the U.S. in 1986. In addition to
senior management, our operational and facility level management has significant
operational expertise. Our wardens have an average of 24 years of correctional
and detention industry experience. We believe that the long, accomplished tenure
of our management team helps to distinguish us from our competitors in the
privatized corrections industry.

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BUSINESS STRATEGIES

PROVIDE HIGH QUALITY, ESSENTIAL SERVICES AT LOWER COSTS

Our objective is to provide federal, state and local governmental agencies
with high quality, essential services at a lower cost than they themselves could
achieve. We generally provide all of the critical services associated with
operating our facilities, including security, food services, rehabilitation
programs, education and on-site health care. We believe this enables us to
ensure high quality and to control costs. Our 24 domestic correctional and
detention facilities that have been rated by the American Correctional
Association, or the ACA, have achieved a median accreditation score of 99.6%.
Accreditation by the ACA serves as a measure of our ongoing compliance with
accepted national industry standards of design and operation and we believe it
helps to provide protection against frivolous inmate litigation. We have
developed standard operating procedures for our facilities that are designed to
maximize efficiency and control our expenses.

MAINTAIN DISCIPLINED OPERATING APPROACH

We manage our business on a contract by contract basis in order to maximize
our operating margins. We typically refrain from pursuing contracts that we do
not believe will yield attractive profit margins in relation to the associated
operational risks. For example, we have avoided operating certain juvenile and
female correctional facilities which we believe may be prone to increased
operational difficulties that may result in increased litigation, higher
personnel costs and reduced profitability. Generally, we do not engage in
speculative development and do not build facilities without having a
corresponding management contract award in place. In addition, we have elected
not to enter certain international markets with a history of economic and
political instability. We believe that our strategy of emphasizing lower risk,
higher profit opportunities helps us to consistently deliver strong operational
performance, lower our costs and increase our overall profitability.

EXPAND INTO COMPLEMENTARY GOVERNMENT-OUTSOURCED SERVICES

We intend to capitalize on our long term relationships with governmental
agencies to continue to grow our correctional, detention and mental health
facilities management services and to become a preferred provider of
complementary government-outsourced services. We believe that government
outsourcing of currently internalized functions will increase largely as a
result of the public sector's desire to maintain quality service levels amid
governmental budgetary constraints. Based on our expansion into the mental
health services sector, we believe that we are well positioned to continue to
deliver higher quality services at lower costs in new areas of privatization.

PURSUE INTERNATIONAL GROWTH OPPORTUNITIES

As a global international provider of privatized correctional services, we
are able to capitalize on opportunities to operate existing or new facilities on
behalf of foreign governments. We currently have operations in Australia, New
Zealand, South Africa and Canada. We intend to further penetrate these markets
and to expand into new international markets which we deem attractive. We
believe that we are one of the few companies worldwide that has the operational
expertise, track record and resources to compete for the management of
large-scale, privatized correctional facilities.

RECENT DEVELOPMENTS

SHARE PURCHASE

On April 30, 2003, we entered into a share purchase agreement with Group 4
Falck A/S, our former majority shareholder which we refer to as Group 4 Falck,
to purchase all 12,000,000 shares of our common stock held by Group 4 Falck for
$132.0 million in cash. Group 4 Falck obtained these shares when it acquired our
former parent company, The Wackenhut Corporation, which we refer to as TWC, in
2002. We completed the share purchase on July 9, 2003.

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RECENT FINANCINGS

In connection with the share purchase, we completed two financing
transactions on July 9, 2003. First, we amended our former senior credit
facility. The amended $150.0 million senior credit facility, which we refer to
as the Senior Credit Facility, consists of a $50.0 million, five-year revolving
credit facility, with a $40.0 million sub limit for letters of credit, and a
$100.0 million, six-year term loan. Second, we offered and sold $150.0 million
aggregate principal amount of 8 1/4% senior notes due 2013, which we refer to as
the Notes.

SALE OF OUR JOINT VENTURE INTEREST IN PREMIER CUSTODIAL GROUP LIMITED

On July 2, 2003, we sold our one-half interest in Premier Custodial Group
Limited, our United Kingdom joint venture, which we refer to as PCG, to Serco
Investments Limited, our former joint venture partner, which we refer to as
Serco, for approximately $80.7 million, on a pretax basis. Under the terms of
the indenture governing the Notes, we have an obligation to use proceeds of
approximately $52 million from the sale of our interest in PCG to reinvest in
certain permitted businesses or assets, to repay indebtedness outstanding under
the Senior Credit Facility or to make an offer to repurchase the Notes.

LOSS OF CONTRACT WITH THE AUSTRALIA DEPARTMENT OF IMMIGRATION, MULTICULTURAL
AND INDIGENOUS AFFAIRS

In Australia, the Department of Immigration, Multicultural and Indigenous
Affairs, which we refer to as DIMIA, entered into a contract in 2003 with a
division of Group 4 Falck for the management and operation of Australia's
immigration centers, services which we have provided since 1997 through our
Australian subsidiary. We transitioned the management and operation of the DIMIA
centers to the division of Group 4 Falck February 29, 2004. For the year ended
December 28, 2003 DIMIA represented approximately 9.9% of our consolidated
revenues. We do not have any lease obligations related to our contract with
DIMIA. During 2003, we increased reserves approximately $3.6 million for
liability insurance obligations related to the expiration of the DIMIA contract.

NAME CHANGE

On November 25, 2003, our corporate name was changed from "Wackenhut
Corrections Corporation" to "The GEO Group, Inc." The name change was required
under the terms of the share purchase agreement between us and Group 4 Falck
referred to above. Under the terms of the share purchase agreement, GEO is
required to cease using the name, trademark and service mark "Wackenhut" by July
9, 2004. In addition to achieving compliance with the terms of the share
purchase agreement, we believe that the change in our name to "The GEO Group,
Inc." will help reinforce the fact that we are no longer affiliated with TWC or
Group 4 Falck or their related entities. Following the name change, our New York
Stock Exchange ticker symbol was changed to "GGI" and our common stock now
trades under that symbol.

RESULTS OF RE-BIDS ON MANAGEMENT CONTRACTS IN TEXAS

As a result of a re-bidding process in Texas on several state management
contracts which expired in January 2004, we were recently awarded management
contracts by the Texas Department of Criminal Justice for the continued
operation of two facilities which we currently operate -- the Cleveland
Correctional Center facility and the Lockhart Secure Work Program Facility. We
were also awarded the management contract to operate a new facility, the Sanders
Estes Correctional Center. However, our existing management contracts to operate
the Willacy State Jail and the John R. Lindsey State Jail were not renewed.
Although the net impact of the Texas re-bid process will result in the overall
loss of one management contract, we do not believe that this will have a
material impact on our future financial performance. The contract awards became
effective on January 16, 2004 and we assumed the operation of the Sanders Estes
Correctional Center on that date.

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RIGHTS AGREEMENT

On October 9, 2003, we entered into a rights agreement with EquiServe Trust
Company, N.A., as rights agent. Under the terms of the rights agreement, each
share of our common stock carries with it one preferred share purchase right. If
the rights become exercisable pursuant to the rights agreement, each right
entitles the registered holder to purchase from us one one-thousandth of a share
of Series A Junior Participating Preferred Stock at a fixed price, subject to
adjustment. Until a right is exercised, the holder of the right has no right to
vote or receive dividends or any other rights as a shareholder as a result of
holding the right. The rights trade automatically with shares of our common
stock, and may only be exercised in connection with certain attempts to take
over our company. The rights are designed to protect the interests of our
company and our shareholders against coercive takeover tactics and encourage
potential acquirors to negotiate with our board of directors before attempting a
takeover. The rights may, but are not intended to, deter takeover proposals that
may be in the interests of our shareholders.

SHELF REGISTRATION STATEMENT

On January 28, 2004, our universal shelf registration statement on Form S-3
was declared effective by the Securities and Exchange Commission, which we refer
to as the SEC. The universal shelf registration statement provides for the offer
and sale by us, from time to time, on a delayed basis, of up to $200.0 million
aggregate amount of our common stock, preferred stock, debt securities,
warrants, and/or depositary shares. These securities, which may be offered in
one or more offerings and in any combination, will in each case be offered
pursuant to a separate prospectus supplement issued at the time of the
particular offering that will describe the specific types, amounts, prices and
terms of the offered securities. Unless otherwise described in the applicable
prospectus supplement relating to the offered securities, we anticipate using
the net proceeds of each offering for general corporate purposes, including debt
repayment, capital expenditures, acquisitions, business expansion, investments
in subsidiaries or affiliates, and/or working capital.

FACILITIES

The following table summarizes certain information with respect to
facilities that GEO (or a subsidiary or joint venture of GEO's) operated under a
management contract or had an award to manage at December 28, 2003. It does not
include the DIMIA facilities.

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CUSTOMER LEGEND:

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(1) These are county contracts providing services through various
Inter-Governmental Agreements ("IGA") for the county, USMS, BICE, BOP, and
other state jurisdictions.
(2) GEO-Owned facilities.
(3) GEO operates a chemical dependency treatment program located in this
facility under a separate contract. This contract is for a three-year term
expiring August 31, 2004.
(4) Contract for maintenance services only for this facility.
(5) GEO purchased this facility and provides services on an individual patient
basis, therefore, there are no contracts with government agencies subject to
terms and/or renewals.
(6) GEO leases these facilities from CPV. In April 1998, GEO sold three owned
facilities and the rights to acquire four other facilities to CPV which CPV
subsequently exercised. In October 1998, GEO sold the completed portion of a
ninth facility to CPV. During Fiscal 1999, CPV acquired a 600-bed expansion
of the ninth facility and the right to acquire a tenth facility. During
Fiscal 2000, CPV purchased an eleventh facility that GEO had the right to
acquire. The facilities were then leased to us under operating leases. There
were no purchase and sale transactions between GEO and CPV in 2001 or 2002.
See Item 2 -- "Properties."
(7) GEO provides comprehensive healthcare services to 11 government-operated
prisons under this contract.
(8) GEO has a five-year contract with five one-year options to operate the
facility on behalf of the county. The county, in turn, has a one-year
contract, subject to annual renewal, with the state to house state prisoners
at the facility.

FACILITY OVERVIEW

We offer services that go beyond simply housing offenders in a safe and
secure manner. We offer a wide array of in-facility rehabilitative and
educational programs. Inmates at most of our facilities can also

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receive basic education through academic programs designed to improve inmates'
literacy levels and to offer the opportunity to acquire General Education
Development certificates. Most of our managed facilities also offer vocational
training for in-demand occupations to inmates who lack marketable job skills. In
addition, most of our managed facilities offer life skills/transition planning
programs that provide inmates job search training and employment skills, anger
management skills, health education, financial responsibility training,
parenting skills and other skills associated with becoming productive citizens.
For example, at the Lockhart Work Program Facility, located in Lockhart, Texas,
we, as part of our job training program, recruited firms from private industry
to employ inmates at the facility. Inmates who participate in such programs
receive job skills training and are paid at least the minimum wage. The inmates'
earnings are used to compensate victims, defray the inmates' housing costs and
support their dependents. We intend to expand this program to our correctional
facilities in South Bay and Moore Haven, Florida. We also offer counseling,
education and/or treatment to inmates with alcohol and drug abuse problems at
most of the domestic facilities we manage. We believe that our program at the
Kyle New Vision Chemical Dependency Treatment Center is the largest privately
managed in-prison program of this nature in the United States.

We operate each facility in accordance with our company-wide policies and
procedures and with the standards and guidelines required under the relevant
contract. For many facilities, the standards and guidelines include those
established by the American Correctional Association. The American Correctional
Association, an independent organization of corrections professionals,
establishes correctional facility standards and guidelines that are generally
acknowledged as a benchmark by governmental agencies responsible for
correctional facilities. Many of our contracts for facilities in the United
States require us to seek and maintain American Correctional Association
accreditation of the facility. We have sought and received American Correctional
Association accreditation for all such facilities. We have also achieved and
maintained certification by the Joint Commission on Accreditation for Health
Care Organizations, or JCAHCO, for both of our mental health facilities.

FACILITY MANAGEMENT CONTRACTS

Other than listed in the following table, no other single customer
accounted for 10% or more of our total revenues for each of the fiscal years
2003, 2002, and 2001.

Except for our contracts for the Taft Correctional Institution, George W.
Hill Correctional Facility, Rivers Correctional Institution, South Florida State
Hospital, and the facilities in Australia, New Zealand and South Africa, all of
which provide for fixed monthly rates, our facility management contracts provide
that we are compensated at an inmate or patient per diem rate based upon actual
or guaranteed occupancy levels. Such compensation is invoiced in accordance with
applicable laws and generally paid on a monthly basis. All of our contracts are
subject to either annual or bi-annual legislative appropriations. A failure by a
governmental agency to receive appropriations could result in termination of the
contract by such agency or a reduction of the management fee payable to us. No
assurance can be given that the governmental agencies with which we contract
will continue to receive appropriations in all cases.

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The following table sets forth the number of contracts that have terms
subject to renewal or re-bid in each of the next five years:

Refer to the table in "Business -- Facilities" for details on the renewal
of these contracts. We undertake substantial efforts to renew our contracts upon
their expiration but we can provide no assurance that we will in fact be able to
do so. Previously, in connection with our contract renewals, either we or the
contracting government agency have typically requested changes or adjustments to
contractual terms. As a result contract renewals may be made on terms that are
more or less favorable to us than in prior contractual terms.

Our contracts typically allow a contracting governmental agency to
terminate a contract with or without cause by giving us written notice ranging
from 30 to 180 days. To date no contracts have been terminated under these
terms.

Since 1999, two contracts have been discontinued by the mutual agreement of
the parties prior to the end of the contract term. Most recently, on June 30,
2000, the cooperative agreement for the management of the Jena Juvenile Justice
Center between us and the LaSalle Hospital District No. 1 was discontinued by
the mutual agreement of the parties.

In addition, in connection with our management of such facilities, we are
required to comply with all applicable local, state and federal laws and related
rules and regulations. Our contracts typically require us to maintain certain
levels of insurance coverage for general liability, workers' compensation,
vehicle liability, and property loss or damage. If we do not maintain the
required categories and levels of coverage, the contracting governmental agency
may be permitted to terminate the contract. Presently, we are insured under a
liability insurance program which includes comprehensive general liability,
automobile liability and workers' compensation coverage. Additionally we
maintain coverage from a third party insurer for property insurance. We carry no
insurance for claims relating to employment matters. There can be no assurance
that we will be able to obtain or maintain insurance levels as required by our
contracts or that, even if obtained, such insurance levels will be sufficient to
cover any losses we sustain. See "Business -- Insurance." In addition, we are
required under our contracts to indemnify the contracting governmental agency
for all claims and costs arising out of our management of facilities and in some
instances we are required to maintain performance bonds relating to the
construction and development of facilities.

FACILITY DESIGN, CONSTRUCTION AND FINANCE

We offer governmental agencies consultation and management services
relating to the design and construction of new correctional and detention
facilities and the redesign and renovation of older facilities. As of December
28, 2003, we had provided services for the design and construction of 32
facilities and for the redesign and renovation of six facilities. See table in
"Business -- Facilities."

Contracts to design and construct or to redesign and renovate facilities
may be financed in a variety of ways. Governmental agencies may finance the
construction of such facilities through the following:

- a one time general revenue appropriation by the governmental agency for
the cost of the new facility;

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- general obligation bonds that are secured by either a limited or
unlimited tax levy by the issuing governmental entity; or

- revenue bonds or certificates of participation secured by an annual lease
payment that is subject to annual or bi-annual legislative
appropriations.

We may also act as a source of financing or as a facilitator with respect
to any financing. In these cases, the construction of such facilities may be
financed through various methods including, but not limited to, the following:

- funds from equity offerings of our stock;

- cash flows from operations;

- borrowings from banks or other institutions (which may or may not be
subject to government guarantees in the event of contract termination);
or

- lease arrangements with third parties.

If the project is financed using direct governmental appropriations, with
proceeds of the sale of bonds or other obligations issued prior to the award of
the project or by us directly, then financing is in place when the contract
relating to the construction or renovation project is executed. If the project
is financed using project-specific tax-exempt bonds or other obligations, the
construction contract is generally subject to the sale of such bonds or
obligations. Generally, substantial expenditures for construction will not be
made on such a project until the tax-exempt bonds or other obligations are sold;
and, if such bonds or obligations are not sold, construction and, therefore,
management of the facility may either be delayed until alternative financing is
procured or the development of the project will be entirely suspended. If the
project is self-financed by us, then financing is in place prior to the
commencement of construction.

When we are awarded a facility management contract, appropriations for the
first annual or biannual period of the contract's term have generally already
been approved, and the contract is subject to governmental appropriations for
subsequent annual or bi-annual periods.

Under our construction and design management contracts, we generally agree
to be responsible for overall project development and completion. We typically
act as the primary developer on construction contracts for facilities and
subcontract with national general contractors. Where possible, we subcontract
with construction companies that we have worked with previously. We make use of
an in-house staff of architects and operational experts from various corrections
disciplines (e.g. security, medical service, food service, inmate programs and
facility maintenance) as part of the team that participates from conceptual
design through final construction of the project. This staff coordinates all
aspects of the development with subcontractors and provides site-specific
services. It has been our experience that it typically takes 9 to 24 months to
construct a facility after the contract is executed and financing approved.

When designing a facility, our architects seek to utilize, with appropriate
modifications, prototype designs we have used in developing prior projects. We
believe that the use of these designs allows us to reduce cost overruns and
construction delays and to reduce the number of officers required to provide
security at a facility, thus controlling costs both to construct and to manage
the facility. Security is maintained because our facility designs increase the
area under direct surveillance by correctional officers and make use of
additional electronic surveillance.

MARKETING AND BUSINESS PROPOSALS

Currently, we view governmental agencies responsible for state and federal
correctional facilities in the United States and governmental agencies
responsible for correctional facilities in Australia, New Zealand and South
Africa as our primary potential customers. Our secondary customers include local
agencies in the U.S. and other foreign governmental agencies.

Governmental agencies responsible for correctional and detention facilities
generally procure goods and services through requests for proposals. A typical
request for proposal requires bidders to provide

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detailed information, including, but not limited to, descriptions of the
following: the services to be provided by the bidder, its experience and
qualifications, and the price at which the bidder is willing to provide the
services (which services may include the renovation, improvement or expansion of
an existing facility, or the planning, design and construction of a new
facility).

If the project meets our profile for new projects, we then will submit a
written response to the request for proposal. We estimate that we typically
spend between $100,000 and $200,000 when responding to a request for proposal.
We have engaged and intend in the future to engage independent consultants to
assist us in developing privatization opportunities and in responding to
requests for proposals, monitoring the legislative and business climate, and
maintaining relationships with existing clients.

There are several critical events in the marketing process for the
management of new facilities, including the issuance of a request for proposals
by a governmental agency, submission of a response to the request for proposals
by us, the award of a contract by a governmental agency and the commencement of
construction or management of a facility. Our experience has been that a period
of approximately five to ten weeks is generally required from the issuance of a
request for proposals to the submission of our response to the request for
proposals; that between one and four months elapse between the submission of our
response and the agency's award for a contract; and that between one and four
months elapse between the award of a contract and the commencement of
construction or management of the facility. If the facility for which an award
has been made must be constructed, our experience is that construction usually
takes between 9 and 24 months, depending on the size and complexity of the
project; therefore, management of a newly constructed facility typically
commences between 10 and 28 months after the governmental agency's award.

INSURANCE

The nature of our business exposes us to various types of third-party legal
claims, including, but not limited to, civil rights claims relating to
conditions of confinement and/or mistreatment, sexual misconduct claims brought
by prisoners or detainees, medical malpractice claims, claims relating to
employment matters (including, but not limited to, employment discrimination
claims, union grievances and wage and hour claims), property loss claims,
environmental claims, automobile liability claims, contractual claims and claims
for personal injury or other damages resulting from contact with our facilities,
programs, personnel or prisoners, including damages arising from a prisoner's
escape or from a disturbance or riot at a facility. In addition, our management
contracts generally require us to indemnify the governmental agency against any
damages to which the governmental agency may be subject in connection with such
claims or litigation. We maintain insurance coverage for these types of claims,
except for claims relating to employment matters, for which we carry no
insurance. However, the insurance we maintain to cover the various liabilities
to which we are exposed may not be adequate. Any losses relating to matters for
which we are either uninsured or for which we do not have adequate insurance
could have a material adverse effect on our business, financial condition or
results of operations.

Claims for which we are insured arising from our U.S. operations that have
an occurrence date of October 1, 2002 or earlier are handled by TWC and are
fully insured up to an aggregate limit of between $25.0 million and $50.0
million, depending on the nature of the claim. With respect to claims for which
we are insured arising from our U.S. operations that have an occurrence date of
October 2, 2002 or later, our coverage varies depending on the nature of the
claim. For claims relating to general liability and automobile liability, we
have a deductible of $1.0 million per claim, primary coverage of $5.0 million
per claim for general liability and $3.0 million per claim for automobile
liability (up to a limit of $20.0 million for all claims in the aggregate), and
excess/umbrella coverage of up to $50.0 million per claim and for all claims in
the aggregate. The current professional liability policy for our mental health
facilities does not include tail coverage for prior periods. For claims relating
to medical malpractice at our correctional facilities, we have a deductible of
$2.0 million per claim and primary coverage of $5.0 million per claim and for
all claims in the aggregate. For claims relating to medical malpractice at our
mental health facilities, we have a deductible of $1.0 million per claim and
primary coverage of up to $5.0 million per claim and for all claims in the
aggregate. For claims relating to workers' compensation, we maintain

13

statutory coverage as determined by state and/or local law and, as a result, our
coverage varies among the various jurisdictions in which we operate.

Claims for which our joint venture in South Africa is insured arising from
its operations, are covered by policies with varying amounts of coverage
depending on the nature of the claim. Primary insurance in the amount of ZAR50
million (approximately $7.5 million at December 28, 2003) is provided for
general liability claims. This insurance contains a ZAR5 million (approximately
$0.8 million at December 28, 2003) deductible. Excess insurance is provided
above the ZAR50 million primary policy with limits up to ZAR250 million
(approximately $37.3 million at December 28, 2003). Medical malpractice claims
are insured up to ZAR14.7 million (approximately $2.2 million at December 28,
2003) with a ZAR50,000 deductible (approximately $7,500 at December 28, 2003).

Claims for which we are insured arising from operations in Australia and
New Zealand are covered by policies with varying amounts of coverage depending
on the nature of the claim. For public liability claims, we maintain primary
insurance of AUD$5 million (approximately $3.7 million at December 28, 2003)
with an AUD$250,000 deductible (approximately $0.2 million at December 28,
2003). Medical malpractice claims are insured up to AUD$10 million
(approximately $7.4 million at December 28, 2003) with an AUD$1 million
deductible (approximately $0.7 million at December 28, 2003).

EMPLOYEES AND EMPLOYEE TRAINING

At December 28, 2003, we had 9,274 full-time employees. Of such full-time
employees, 138 were employed at our headquarters and regional offices and 9,136
were employed at facilities and international offices. We employ management,
administrative and clerical, security, educational services, health services and
general maintenance personnel. In the U.S., our correctional officer employees
at George W. Hill Correctional Facility (Pennsylvania), Queens Private
Correctional Facility (New York), Michigan Youth Correctional Facility
(Michigan) and Desert View Modified Community Correctional Facility (California)
are members of unions. We successfully renegotiated union contracts at the
Queens Private Correctional Facility (New York) and George W. Hill Correctional
Facility (Pennsylvania) during 2003. We expect to renegotiate the union contract
at Michigan Youth Correctional Facility (Michigan) during 2004. In addition, our
correctional officer employees at Auckland Central Remand Prison (New Zealand),
South Africa and the majority of our employees in our Australian operations are
covered by union agreements. Other than the contracts described above, we have
no other union contracts or collective bargaining agreements. We believe our
relationships with our employees are good.

Under the laws applicable to most of our operations, and internal company
policies, our correctional officers are required to complete a minimum amount of
training. We generally require at least 160 hours of pre-service training before
an employee is allowed to work in a position that will bring him or her in
contact with inmates, consistent with ACA standards and/or applicable state
laws. In addition to a minimum of 160 hours of pre-service training, most states
require 40 or 80 hours of on-the-job training. Florida law requires that
correction officers receive 520 hours of training and Michigan law requires that
correctional officers receive 640 hours of training. Our training programs meet
or exceed all applicable requirements.

Our training program begins with approximately 40 hours of instruction
regarding our policies, operational procedures and management philosophy.
Training continues with an additional 120 hours of instruction covering legal
issues, rights of inmates, techniques of communication and supervision,
interpersonal skills and job training relating to the particular position to be
held. Each of our employees who has contact with inmates receives a minimum of
40 hours of additional training each year, and each manager receives at least 24
hours of training each year.

At least 240 and 160 hours of training are required for our employees in
Australia and South Africa, respectively, before such employees are allowed to
work in positions that will bring them into contact with inmates. Our employees
in Australia and South Africa receive a minimum of 40 hours of additional
training each year.

14

COMPETITION

We compete primarily on the basis of the quality and range of services
offered, our experience (both domestically and internationally) in the design,
construction and management of privatized correctional and detention facilities,
our reputation and our pricing. We compete with a number of companies,
including, but not limited to: Corrections Corporation of America; Correctional
Services Corporation; Cornell Companies, Inc.; and Management and Training
Corporation and Group 4 Falck Global Solutions Limited. Some of our competitors
are larger and have more resources than we do. We also compete in some markets
with small local companies that may have a better knowledge of the local
conditions and may be better able to gain political and public acceptance. In
addition, in some markets, we may compete with governmental agencies that are
responsible for correctional facilities. Upon the completion of the share
purchase from Group 4 Falck, the non-compete agreement we had with Group 4 Falck
which prevented Group 4 Falck from competing with us in the U.S. was terminated
and Group 4 Falck and its affiliates, including Group 4 Falck Global Solutions
Limited, became free to compete with us in the U.S.

NON-U.S. OPERATIONS

Although most of our operations are within the United States, our
international operations make a significant contribution to our results of
operations. Our wholly-owned subsidiaries provide correctional and detention
facilities management in Australia and New Zealand.

A summary of U.S. and Australia operations is presented below:

15

We formerly had an affiliate (50% or less owned) that provided correctional
detention facilities management, home monitoring and court escort services in
the United Kingdom. We sold our interest in this affiliate on July 2, 2003 for
approximately $80.7 million and recognized a pre-tax gain of approximately $61.0
million. The following table summarizes certain financial information pertaining
to this joint venture as of December 29, 2002 and for the period from December
30, 2002 through the date of sale of the UK joint venture on July 2, 2003 and
for the fiscal years ended December 29, 2002 and December 30, 2001 (in
thousands):

Our affiliates (50% owned), South African Custodial Services, Pty. Ltd. and
South African Management, Pty. Ltd., provide correctional and detention
facilities management in South Africa. The following table summarizes certain
financial information pertaining to these South African unconsolidated foreign
affiliates, on a combined basis, as of December 28, 2003 and December 29, 2002
and for the fiscal years ended December 28, 2003, December 29, 2002 and December
30, 2001, respectively (in thousands).

BUSINESS REGULATIONS AND LEGAL CONSIDERATIONS

Certain states, such as Florida and Texas, deem correctional officers to be
peace officers and require our personnel to be licensed and subject to
background investigation. State law also typically requires correctional
officers to meet certain training standards.

In addition, many governmental agencies are required to enter into a
competitive bidding procedure before awarding contracts for products or
services. The laws of certain jurisdictions may also require us to award
subcontracts on a competitive basis or to subcontract with businesses owned by
women or members of minority groups.

The failure to comply with any applicable laws, rules or regulations or the
loss of any required license could have a material adverse effect on our
business, financial condition and results of operations.

16

Furthermore, our current and future operations may be subject to additional
regulations as a result of, among other factors, new statutes and regulations
and changes in the manner in which existing statutes and regulations are or may
be interpreted or applied. Any such additional regulations could have a material
adverse effect on our business, financial condition and results of operations.

SHARE PURCHASE FROM GROUP 4 FALCK A/S

On July 9, 2003 we purchased all 12 million shares of our common stock
beneficially owned by Group 4 Falck, our former 57% majority shareholder, for
$132.0 million in cash pursuant to the terms of a share purchase agreement,
dated April 30, 2003, by and among us, Group 4 Falck, our former parent company,
TWC, and Tuhnekcaw, Inc., an indirect wholly-owned subsidiary of Group 4 Falck.

The share purchase was negotiated by a special committee comprised of
independent members of our board of directors and approved by the independent
directors on our board. The special committee retained independent legal and
financial advisors to assist it in the evaluation of the share purchase. The
special committee received a fairness opinion from its independent financial
advisor, stating that the consideration being paid in connection with the share
purchase was fair from a financial point of view to our shareholders other than
Group 4 Falck and its affiliates.

Under the terms of the share purchase agreement, Group 4 Falck, TWC and
Tuhnekcaw cannot, and cannot permit any of their subsidiaries to, acquire
beneficial ownership of any of our voting securities during a one-year
standstill period following the closing of the share purchase. Immediately
following the completion of the share purchase, we had 9,289,252 million shares
of common stock issued and outstanding.

Upon closing of the share purchase, an agreement dated March 7, 2002
between us, Group 4 Falck and TWC, which governed certain aspects of the
parties' relationship, was terminated and the two Group 4 Falck representatives
serving on our board of directors resigned. Also terminated upon the closing of
the share purchase was a March 7, 2002 agreement between us and Group 4 Falck
wherein Group 4 Falck agreed to reimburse us for up to 10% of the fair market
value of our interest in our UK joint venture in the event that litigation
related to the sale of TWC to Group 4 Falck were to result in a court order
requiring us to sell our interest in the joint venture to our partner, Serco
Investments Limited, which we refer to as Serco. On July 2, 2003, we completed
the sale of our UK joint venture interest to Serco at a price of approximately
$80.7 million, as determined by a panel of valuation experts. We recognized a
pre-tax gain on the sale of approximately $61.0 million during the third quarter
of 2003.

In addition, in connection with the share purchase, the Services Agreement,
dated October 28, 2002, between us and TWC, which we refer to as the Services
Agreement, terminated effective December 31, 2003, and no further payments for
periods thereafter are due from us to Group 4 Falck under the Services
Agreement. Pursuant to the terms of the Services Agreement, Group 4 Falck had
been scheduled to provide us with information systems related services through
December 31, 2004. We began handling those services internally beginning January
1, 2004.

A sublease for our former headquarters between TWC, as sublessor, and us,
as sublessee, also terminated ten days after the closing of the share purchase.
We relocated our corporate headquarters to Boca Raton, Florida on April 14,
2003.

AVAILABILITY OF REPORTS AND OTHER INFORMATION

Our corporate website is located at http://www.thegeogroupinc.com. We have
made available on our website, free of charge, access to our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy
Statement on Schedule 14A and amendments to those materials filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as
soon as reasonably practicable after we electronically submit such materials to
the SEC. In addition, the SEC's website is located at http://www.sec.gov. The
SEC makes available on its website, free of charge, reports, proxy and
information statements, and other information regarding issuers that file
electronically with the

17

SEC. Information provided on our website or on the SEC's website is not part of
this Annual Report on Form 10-K.

RISK FACTORS

The following are certain of the risks to which our business operations are
subject. Any of these risks could materially adversely affect our business,
financial condition, or results of operations. These risks could also cause our
actual results to differ materially from those indicated in the forward-looking
statements contained herein and elsewhere. The risks described below are not the
only risks facing us. Additional risks not currently known to us or those we
currently deem to be immaterial may also materially and adversely affect our
business operations.

RISKS RELATED TO OUR HIGH LEVEL OF INDEBTEDNESS

OUR SIGNIFICANT LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND PREVENT US FROM FULFILLING OUR DEBT SERVICE OBLIGATIONS.

We have a significant amount of indebtedness. Our total consolidated
long-term indebtedness as of December 28, 2003 was $248.8 million, excluding non
recourse debt of $43.9 million. In addition, as of December 28, 2003, we had
$24.5 million outstanding in letters of credit under the revolving loan portion
of our Senior Credit Facility. As a result, as of that date, we would have had
the ability to borrow an additional approximately $25.5 million under the
revolving loan portion of our Senior Credit Facility, subject to our satisfying
the relevant borrowing conditions under the Senior Credit Facility with respect
to the incurrence of additional indebtedness.

Our substantial indebtedness could have important consequences. For
example, it could:

require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing the availability of our cash flow
to fund working capital, capital expenditures, and other general corporate
purposes;

- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;

- increase our vulnerability to adverse economic and industry conditions;

- place us at a competitive disadvantage compared to competitors that may
be less leveraged; and

- limit our ability to borrow additional funds or refinance existing
indebtedness on favorable terms.

If we are unable to meet our debt service obligations, we may need to
reduce capital expenditures, restructure or refinance our indebtedness, obtain
additional equity financing or sell assets. We may be unable to restructure or
refinance our indebtedness, obtain additional equity financing or sell assets on
satisfactory terms or at all. In addition, our ability to incur additional
indebtedness will be restricted by the terms of our Senior Credit Facility and
the indenture governing our outstanding Notes.

DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL INCUR MORE INDEBTEDNESS,
WHICH COULD FURTHER EXACERBATE THE RISKS DESCRIBED ABOVE. FUTURE INDEBTEDNESS
ISSUED PURSUANT TO OUR UNIVERSAL SHELF REGISTRATION STATEMENT COULD HAVE
RIGHTS SUPERIOR TO THOSE OF OUR EXISTING OR FUTURE INDEBTEDNESS.

The terms of the indenture governing the Notes and our Senior Credit
Facility restrict our ability to incur but do not prohibit us from incurring
significant additional indebtedness in the future. In addition, we may refinance
all or a portion of our indebtedness, including borrowings under our Senior
Credit Facility, and incur more indebtedness as a result. If new indebtedness is
added to our and our subsidiaries' current debt levels, the related risks that
we and they now face could intensify. As of December 28, 2003, we would have had
the ability to borrow an additional approximately $25.5 million under the
revolving loan portion of our Senior Credit Facility. Additionally, on January
28, 2004, our universal shelf registration statement on Form S-3 was declared
effective by the SEC. The universal shelf registration statement provides for
the offer and sale by us, from time to time, on a delayed basis of up to $200.0
million aggregate amount of certain of our securities, including our debt
securities. Any

18

indebtedness incurred pursuant to the universal shelf registration statement
will be created through the issuance of these debt securities. Such debt
securities may be issued in more than one series and some of those series may
have characteristics that provide them with rights that are superior to those of
other series of our debt securities that have already been created or that will
be created in the future.

THE COVENANTS IN THE INDENTURE GOVERNING THE NOTES AND OUR SENIOR CREDIT
FACILITY IMPOSE SIGNIFICANT OPERATING AND FINANCIAL RESTRICTIONS WHICH MAY
ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR BUSINESS.

The indenture governing the Notes and our Senior Credit Facility impose
significant operating and financial restrictions on us and certain of our
subsidiaries, which we refer to as restricted subsidiaries. These restrictions
limit our ability to, among other things:

- incur additional indebtedness;

- pay dividends and or distributions on our capital stock or repurchase,
redeem or retire our capital stock, prepay subordinated indebtedness and
make investments;

- issue preferred stock of subsidiaries;

- make certain types of investments;

- guarantee other indebtedness;

- create liens on our assets;

- transfer and sell assets;

- create or permit restrictions on the ability of our restricted
subsidiaries to make dividends or make other distributions to us;

- enter into sale/leaseback transactions;

- enter into transactions with affiliates; and

- merge or consolidate with another company or sell all or substantially
all of our assets.

These restrictions could limit our ability to finance our future operations
or capital needs, make acquisitions or pursue available business opportunities.
In addition, our Senior Credit Facility requires us to maintain specified
financial ratios and satisfy certain financial covenants, including maintaining
maximum senior and total leverage ratios, a minimum fixed charge coverage ratio,
a minimum net worth and a limit on the amount of our annual capital
expenditures. Some of these financial ratios become more restrictive over the
life of the Senior Credit Facility. We may be required to take action to reduce
our indebtedness or to act in a manner contrary to our business objectives to
meet these ratios and satisfy these covenants. Our failure to comply with any of
the covenants under our Senior Credit Facility and the indenture governing the
Notes could cause an event of default under such documents and result in an
acceleration of all of our outstanding indebtedness. If all of our outstanding
indebtedness were to be accelerated, we likely would not be able to
simultaneously satisfy all of our obligations under such indebtedness, which
would materially adversely affect our financial condition and results of
operations.

SERVICING OUR INDEBTEDNESS WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.

Our ability to make payments on our indebtedness and to fund planned
capital expenditures will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.

Our business may not be able to generate sufficient cash flow from
operations or future borrowings may not be available to us under our Senior
Credit Facility or otherwise in an amount sufficient to enable us to pay our
indebtedness or new debt securities, or to fund our other liquidity needs. We
may need to refinance all or a portion of our indebtedness on or before
maturity. However, we may not be able to complete such refinancing on
commercially reasonable terms or at all.

19

BECAUSE PORTIONS OF OUR INDEBTEDNESS HAVE FLOATING INTEREST RATES, A GENERAL
INCREASE IN INTEREST RATES WILL ADVERSELY AFFECT CASH FLOWS.

Our Senior Credit Facility bears interest at a variable rate. To the extent
our exposure to increases in interest rates is not eliminated through interest
rate protection agreements, such increases will adversely affect our cash flows.
We do not currently have any interest rate protection agreements in place to
protect against interest rate fluctuations related to the Senior Credit
Facility. Our estimated total annual interest expense based on borrowings
outstanding as of December 28, 2003 is approximately $19.3 million, $3.0 million
of which is interest expense attributable to estimated borrowings of $98.8
million currently outstanding under the Senior Credit Facility inclusive of
expected mandatory payments under the Senior Credit Facility. Additionally,
based on estimated borrowings under the Senior Credit Facility, inclusive of
expected mandatory payments, a one percent increase in the interest rate
applicable to the Senior Credit Facility, will increase interest expense by $0.7
million.

In addition, effective September 18, 2003, we entered into interest rate
swap agreements in the aggregate notional amount of $50.0 million. The
agreements, which have payment and expiration dates that coincide with the
payment and expiration terms of the Notes, effectively convert $50.0 million of
the Notes into variable rate obligations. Under the agreements, we receive a
fixed interest rate payment from the financial counterparties to the agreements
equal to 8.25% per year calculated on the notional $50.0 million amount, while
we make a variable interest rate payment to the same counterparties equal to the
six-month London Interbank Offered Rate plus a fixed margin of 3.45%, also
calculated on the notional $50.0 million amount. As a result, for every one
percent increase in the interest rate applicable to the swap agreements, our
total annual interest expense will increase by $0.5 million.

WE DEPEND ON DISTRIBUTIONS FROM OUR SUBSIDIARIES TO MAKE PAYMENTS ON OUR
INDEBTEDNESS. THESE DISTRIBUTIONS MAY NOT BE MADE.

We generate a substantial portion of our revenues from distributions on the
equity interests we hold in our subsidiaries. Therefore, our ability to meet our
payment obligations on our indebtedness is substantially dependent on the
earnings of our subsidiaries and the payment of funds to us by our subsidiaries
as dividends, loans, advances or other payments. Our subsidiaries are separate
and distinct legal entities and are not obligated to make funds available for
payment of our other indebtedness in the form of loans, distributions or
otherwise. Our subsidiaries' ability to make any such loans, distributions or
other payments to us will depend on their earnings, business results, the terms
of their existing and any future indebtedness, tax considerations and legal or
contractual restrictions to which they may be subject. If our subsidiaries do
not make such payments to us, our ability to repay our indebtedness will be
materially adversely affected. For the fiscal year ended December 28, 2003, our
subsidiaries accounted for 27.9% of our consolidated revenues, and, as of
December 28, 2003 our subsidiaries accounted for 22.0% of our consolidated total
assets.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

OUR RESULTS OF OPERATIONS ARE DEPENDENT ON REVENUES GENERATED BY OUR PRISONS
AND DETENTION FACILITIES, WHICH ARE SUBJECT TO THE FOLLOWING RISKS ASSOCIATED
WITH THE CORRECTIONS AND DETENTION INDUSTRY.

We are subject to the termination or non-renewal of our government
contracts, which could adversely affect our results of operations and liquidity,
including our ability to secure new facility management contracts from other
government customers. Governmental agencies may terminate a facility contract
at any time without cause or use the possibility of termination to negotiate a
lower fee for per diem rates. They also generally have the right to renew
facility contracts at their option. Notwithstanding any contractual renewal
option, as of December 28, 2003, twenty-three of our facility management
contracts are scheduled to expire on or before January 2, 2005. These contracts
represented 44.6% of our consolidated revenues for the year ended December 28,
2003. Some of these contracts may not be renewed by the corresponding
governmental agency. Additionally, four of our contracts, which represented
14.0% of our consolidated revenues for the fiscal year ended December 28, 2003
were not renewed in 2003 and

20

terminated on their scheduled expiration dates, all of which occurred prior to
March 1, 2004. We do not expect the loss of these four contracts to affect our
ability to satisfy our financial obligations. Also, some of our other contracts
scheduled to expire after January 2, 2005 may not be renewed. See "Business --
Facilities and Facility Management Contracts." In addition, governmental
agencies may determine not to exercise renewal options with respect to any of
our contracts in the future. In the event any of our management contracts are
terminated or are not renewed on favorable terms or otherwise, we may not be
able to obtain additional replacement contracts. The non-renewal or termination
of any of our contracts with governmental agencies could materially adversely
affect our financial condition, results of operations and liquidity, including
our ability to secure new facility management contracts from other government
customers.

In Australia, the Department of Immigration, Multicultural and Indigenous
Affairs, which we refer to as DIMIA, entered into a contract in 2003 with a
division of Group 4 Falck for the management and operation of Australia's
immigration centers, services which we have provided since 1997 through our
Australian subsidiary. We transitioned the management and operation of the DIMIA
centers to the division of Group 4 Falck effective February 29, 2004. For the
year ended December 28, 2003 DIMIA represented approximately 9.9% of our
consolidated revenues. We do not have any lease obligations related to our
contract with DIMIA. During 2003, we increased reserves approximately $3.6
million for liability insurance obligations related to the expiration of the
DIMIA contract.

We will continue to be responsible for certain real property payments even
if our underlying facility management contracts terminate, which could adversely
affect our profitability. Eleven of our facilities are leased from Correctional
Properties Trust, an independent, publicly-traded REIT which we refer to as CPV.
These leases have an initial ten-year term with varying renewal periods at our
option, and a total average remaining initial term of 4.6 years. The facility
management contracts underlying these leases generally have a term ranging from
one to five years, however, they are terminable by the governmental entity at
will. In the event that a facility management contract is terminated or expires
and is not renewed prior to the expiration of the corresponding lease term for
the facility, we will continue to be liable to CPV for the related lease
payments. Our average annual obligations and aggregate total remaining
obligations for lease payments under the eleven CPV leases are approximately
$24.2 million and $116.0 million, respectively. Because these lease payments
would not be offset by revenues from an active facility management contract,
they could represent a material ongoing loss. If we are unable to find a
replacement management contract or an alternative use for the facility, the loss
could continue until the expiration of the lease term then in effect, which
could adversely affect our profitability.

For example, during 2000, our management contract at the 276-bed Jena
Juvenile Justice Center in Jena, Louisiana was discontinued by the mutual
agreement of the parties. Despite the discontinuation of the management
contract, we remain responsible for payments on our underlying lease of the
inactive facility. We incurred an operating charge of $1.1 million during the
year ended December 29, 2002 related to our lease of the inactive facility that
represented the expected costs to be incurred under the lease until a sublease
or alternative use could be initiated in early 2004. During 2003 parties that we
previously believed might sublease the facility prior to early 2004 either
indicated that they did not have an immediate need for the facility or did not
enter into a binding commitment for a sublease of the facility. As a result our
management determined that it was unlikely that we would sublease the facility
or find an alternative correctional use for the facility prior to the expiration
of the provision for anticipated losses through early 2004 and we incurred an
additional operating charge of $5.0 million during 2003. This additional
operating charge both covers our anticipated losses under the lease for the
facility until a sublease is in place and provides us with an estimated discount
to sublease the facility to prospective sublessees. We are continuing our
efforts to find a sublease or alternative correctional use for the facility. If
we are unable to sublease or find an alternative correctional use for the
facility prior to January 2006, an additional operating charge will be required.
As of December 28, 2003, the remaining obligation on the Jena lease through the
contractual term of 2009, exclusive of the reserve for losses through early
2006, is approximately $7.0 million.

21

Also, our contract with the California Department of Corrections for the
management of the 224-bed McFarland Community Corrections Center expired on
December 31, 2003. During the year ended December 28, 2003, the contract for the
McFarland facility represented less than 1% of our consolidated revenues. Even
though we are no longer operating the McFarland facility, we will continue to be
responsible for payments on our underlying lease of the facility with CPV
through 2008, when the lease is scheduled to expire. We are actively pursuing
various alternatives for the facility, including finding an alternative
correctional use for the facility or subleasing the facility to agencies of the
federal and/or state governments or another private operator. If we are unable
to find an appropriate correctional use for the facility or sublease the
facility, we may be required to record an operating charge related to a portion
of the future lease costs with CPV in accordance with SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." The remaining lease
obligation related to the McFarland facility is approximately $3.3 million
through April 28, 2008.

In addition, we own four properties on which we operate correctional and
detention facilities. Our purchase of these properties during 2002 was financed
through borrowings under our former senior credit facility which have now been
incorporated into our Senior Credit Facility. In the event that an underlying
facility management contract for one or more of these properties terminates, we
would still be responsible for servicing the indebtedness incurred to purchase
those properties.

Our growth depends on our ability to secure contracts to develop and manage
new correctional and detention facilities, the demand for which is outside our
control. Our growth is generally dependent upon our ability to obtain new
contracts to develop and manage new correctional and detention facilities,
because contracts to manage existing public facilities have not to date
typically been offered to private operators. Public sector demand for new
facilities may decrease and our potential for growth will depend on a number of
factors we cannot control, including overall economic conditions, crime rates
and sentencing patterns in jurisdictions in which we operate governmental and
public acceptance of the concept of privatization and the number of facilities
available for privatization.

The demand for our facilities and services could be adversely affected by
the relaxation of criminal enforcement efforts, leniency in conviction and
sentencing practices, or through the decriminalization of certain activities
that are currently proscribed by criminal laws. For instance, any changes with
respect to the decriminalization of drugs and controlled substances or a
loosening of immigration laws could affect the number of persons arrested,
convicted, sentenced and incarcerated, thereby potentially reducing demand for
correctional facilities to house them. Similarly, reductions in crime rates
could lead to reductions in arrests, convictions and sentences requiring
incarceration at correctional facilities.

We may not be able to secure financing and desirable locations for new
facilities, which could adversely affect our results of operations and future
growth. In certain cases, the development and construction of facilities by us
is subject to obtaining construction financing. Such financing may be obtained
through a variety of means, including without limitation, the sale of tax-exempt
or taxable bonds or other obligations or direct governmental appropriations. The
sale of tax-exempt or taxable bonds or other obligations may be adversely
affected by changes in applicable tax laws or adverse changes in the market for
tax-exempt or taxable bonds or other obligations.

Moreover, certain jurisdictions, including California, where we have a
significant amount of operations, have in the past required successful bidders
to make a significant capital investment in connection with the financing of a
particular project. If this trend were to continue in the future, we may not be
able to obtain sufficient capital resources when needed to compete effectively
for facility management contacts. Additionally, our success in obtaining new
awards and contracts may depend, in part, upon our ability to locate land that
can be leased or acquired under favorable terms. Otherwise desirable locations
may be in or near populated areas and, therefore, may generate legal action or
other forms of opposition from residents in areas surrounding a proposed site.
Our inability to secure financing and desirable locations for new facilities
could adversely affect our results of operations and future growth.

We depend on a limited number of governmental customers for a significant
portion of our revenues. The loss of, or a significant decrease in business
from, these customers could seriously harm our financial

22

condition and results of operations. We currently derive, and expect to
continue to derive, a significant portion of our revenues from a limited number
of governmental agencies. The loss of, or a significant decrease in, business
from the Bureau of Prisons, the Bureau of Immigration and Customs Enforcement,
which we refer to as BICE, or the U.S. Marshals Service or various state
agencies could seriously harm our financial condition and results of operations.
The three federal governmental agencies with correctional and detention
responsibilities, the Bureau of Prisons, BICE and the Marshals Service,
accounted for approximately 24.9% of our total consolidated revenues for the
fiscal year ended December 28, 2003, with the Bureau of Prisons accounting for
approximately 10.4% of our total consolidated revenues for such period, the
Marshals Service accounting for approximately 9.0% of our total consolidated
revenues for such period and the BICE accounting for approximately 5.5% of our
total consolidated revenues for such period. We expect to continue to depend
upon these federal agencies and a relatively small group of other governmental
customers for a significant percentage of our revenues.

A decrease in occupancy levels could cause a decrease in revenues and
profitability. While a substantial portion of our cost structure is generally
fixed, a significant portion of our revenues are generated under facility
management contracts which provide for per diem payments based upon daily
occupancy. We are dependent upon the governmental agencies with which we have
contracts to provide inmates for our managed facilities. We cannot control
occupancy levels at our managed facilities. Under a per diem rate structure, a
decrease in our occupancy rates could cause a decrease in revenues and
profitability. When combined with relatively fixed costs for operating each
facility, regardless of the occupancy level, a decrease in occupancy levels
could have a material adverse effect on our profitability.

Competition for inmates may adversely affect the profitability of our
business. We compete with government entities and other private operators on
the basis of cost, quality and range of services offered, experience in managing
facilities, and reputation of management and personnel. Barriers to entering the
market for the management of correctional and detention facilities may not be
sufficient to limit additional competition in our industry. In addition, our
government customers may assume the management of a facility currently managed
by us upon the termination of the corresponding management contract or, if such
customers have capacity at the facilities which they operate, they may take
inmates currently housed in our facilities and transfer them to government
operated facilities. Since we are paid on a per diem basis with no minimum
guaranteed occupancy under most of our contracts, the loss of such inmates and
resulting decrease in occupancy would cause a decrease in both our revenues and
our profitability.

We are dependent on government appropriations, which may not be made on a
timely basis or at all. Our cash flow is subject to the receipt of sufficient
funding of and timely payment by contracting governmental entities. If the
contracting governmental agency does not receive sufficient appropriations to
cover its contractual obligations, it may terminate our contract or delay or
reduce payment to us. Any delays in payment, or the termination of a contract,
could have a material adverse effect on our cash flow and financial condition,
which may make it difficult to satisfy our payment obligations on our
indebtedness, including the Notes and the Senior Credit Facility, in a timely
manner. In addition, as a result of, among other things, recent economic
developments, federal, state and local governments have encountered, and may
continue to encounter, unusual budgetary constraints. As a result, a number of
state and local governments are under pressure to control additional spending or
reduce current levels of spending. Accordingly, we may be requested in the
future to reduce our existing per diem contract rates or forego prospective
increases to those rates. In addition, it may become more difficult to renew our
existing contracts on favorable terms or at all.

Public resistance to privatization of correctional and detention facilities
could result in our inability to obtain new contracts or the loss of existing
contracts, which could have a material adverse effect on our business, financial
condition and results of operations. The management and operation of
correctional and detention facilities by private entities has not achieved
complete acceptance by either governments or the public. Some governmental
agencies have limitations on their ability to delegate their traditional
management responsibilities for correctional and detention facilities to private
companies and additional legislative changes or prohibitions could occur that
further increase these limitations. In addition, the movement toward
privatization of correctional and detention facilities has encountered
resistance from

23

groups, such as labor unions, that believe that correctional and detention
facilities should only be operated by governmental agencies. Changes in dominant
political parties could also result in significant changes to previously
established views of privatization. Increased public resistance to the
privatization of correctional and detention facilities in any of the markets in
which we operate, as a result of these or other factors, could have a material
adverse effect on our business, financial condition and results of operations.

Adverse publicity may negatively impact our ability to retain existing
contracts and obtain new contracts. Our business is subject to public
scrutiny. Any negative publicity about an escape, riot or other disturbance or
perceived poor conditions at a privately managed facility may result in
publicity adverse to us and the private corrections industry in general. Any of
these occurrences or continued trends may make it more difficult for us to renew
existing contracts or to obtain new contracts or could result in the termination
of an existing contract or the closure of one of our facilities, which could
have a material adverse effect on our business.

We may incur significant start-up and operating costs on new contracts
before receiving related revenues, which may impact our cash flows and not be
recouped. When we are awarded a contract to manage a facility, we may incur
significant start-up and operating expenses, including the cost of constructing
the facility, purchasing equipment and staffing the facility, before we receive
any payments under the contract. These expenditures could result in a
significant reduction in our cash reserves and may make it more difficult for us
to meet other cash obligations, including our payment obligations on the Notes
and the Senior Credit Facility. In addition, a contract may be terminated prior
to its scheduled expiration and as a result we may not recover these
expenditures or realize any return on our investment.

Failure to comply with extensive government regulation and unique
contractual requirements could have a material adverse effect on our business,
financial condition or results of operations. The industry in which we operate
is subject to extensive federal, state and local regulations, including
educational, environmental, health care and safety regulations, which are
administered by many regulatory authorities. Some of the regulations are unique
to the corrections industry, and the combination of regulations affects all
areas of our operations. Facility management contracts typically include
reporting requirements, supervision and on-site monitoring by representatives of
the contracting governmental agencies. Corrections officers and juvenile care
workers are customarily required to meet certain training standards and, in some
instances, facility personnel are required to be licensed and are subject to
background investigations. Certain jurisdictions also require us to award
subcontracts on a competitive basis or to subcontract with businesses owned by
members of minority groups. We may not always successfully comply with these and
other regulations to which we are subject and failure to comply can result in
material penalties or the non-renewal or termination of facility management
contracts. In addition, changes in existing regulations could require us to
substantially modify the manner in which we conduct our business and, therefore,
could have a material adverse effect on us.

In addition, private prison managers are increasingly subject to government
legislation and regulation attempting to restrict the ability of private prison
managers to house certain types of inmates, such as inmates from other
jurisdictions or inmates at medium or higher security levels. Legislation has
been enacted in several states, and has previously been proposed in the United
States House of Representatives, containing such restrictions. Although we do
not believe that existing legislation will have a material adverse effect on us,
future legislation may have such an effect on us.

Governmental agencies may investigate and audit our contracts and, if any
improprieties are found, we may be required to refund amounts we have received,
to forego anticipated revenues and we may be subject to penalties and sanctions,
including prohibitions on our bidding in response to Requests for Proposals, or
RFPs, from governmental agencies to manage correctional facilities. Governmental
agencies we contract with have the authority to audit and investigate our
contracts with them. As part of that process, governmental agencies may review
our performance of the contract, our pricing practices, our cost structure and
our compliance with applicable laws, regulations and standards. For contracts
that actually or effectively provide for certain reimbursement of expenses, if
an agency determines that we have improperly allocated costs to a specific
contract, we may not be reimbursed for those costs, and we could be required

24

to refund the amount of any such costs that have been reimbursed. If a
government audit asserts improper or illegal activities by us, we may be subject
to civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeitures of profits, suspension of payments, fines
and suspension or disqualification from doing business with certain governmental
entities. Any adverse determination could adversely impact our ability to bid in
response to RFPs in one or more jurisdictions.

We may face community opposition to facility location, which may adversely
affect our ability to obtain new contracts. Our success in obtaining new awards
and contracts sometimes depends, in part, upon our ability to locate land that
can be leased or acquired, on economically favorable terms, by us or other
entities working with us in conjunction with our proposal to construct and/or
manage a facility. Some locations may be in or near populous areas and,
therefore, may generate legal action or other forms of opposition from residents
in areas surrounding a proposed site. When we select the intended project site,
we attempt to conduct business in communities where local leaders and residents
generally support the establishment of a privatized correctional or detention
facility. Future efforts to find suitable host communities may not be
successful. In many cases, the site selection is made by the contracting
governmental entity. In such cases, site selection may be made for reasons
related to political and/or economic development interests and may lead to the
selection of sites that have less favorable environments.

Our business operations expose us to various liabilities for which we may
not have adequate insurance. The nature of our business exposes us to various
types of third-party legal claims, including, but not limited to, civil rights
claims relating to conditions of confinement and/or mistreatment, sexual
misconduct claims brought by prisoners or detainees, medical malpractice claims,
claims relating to employment matters (including, but not limited to, employment
discrimination claims, union grievances and wage and hour claims), property loss
claims, environmental claims, automobile liability claims, contractual claims
and claims for personal injury or other damages resulting from contact with our
facilities, programs, personnel or prisoners, including damages arising from a
prisoner's escape or from a disturbance or riot at a facility. In addition, our
management contracts generally require us to indemnify the governmental agency
against any damages to which the governmental agency may be subject in
connection with such claims or litigation. We maintain insurance coverage for
these types of claims, except for claims relating to employment matters.
However, the insurance we maintain to cover the various liabilities to which we
are exposed may not be adequate. Any losses relating to matters for which we are
either uninsured or for which we do not have adequate insurance could have a
material adverse effect on our business, financial condition or results of
operations. In addition, any losses relating to employment matters could have a
material adverse effect on our business, financial condition or results of
operations.

Claims for which we are insured arising from our U.S. operations that have
an occurrence date of October 1, 2002 or earlier are handled by TWC and are
fully insured up to an aggregate limit of between $25.0 million and $50.0
million, depending on the nature of the claim. With respect to claims for which
we are insured arising from our U.S. operations that have an occurrence date of
October 2, 2002 or later, our coverage varies depending on the nature of the
claim. For claims relating to general liability and automobile liability, we
have a deductible of $1.0 million per claim, primary coverage of $5.0 million
per claim for general liability and $3.0 million per claim for automobile
liability (up to a limit of $20.0 million for all claims in the aggregate), and
excess/umbrella coverage of up to $50.0 million per claim and for all claims in
the aggregate. For claims relating to medical malpractice at our correctional
facilities, we have a deductible of $1.0 million per claim and primary coverage
of $5.0 million per claim and for all claims in the aggregate. For claims
relating to medical malpractice at our mental health facilities, we have a
deductible of $2.0 million per claim and primary coverage of up to $5.0 million
per claim and for all claims in the aggregate. The current professional
liability policy for our mental health facilities does not include tail coverage
for prior periods. For claims relating to workers' compensation, we maintain
statutory coverage as determined by state and/or local law and, as a result, our
coverage varies among the various jurisdictions in which we operate.

Claims for which our joint venture in South Africa is insured arising from
its operations, are covered by policies with varying amounts of coverage
depending on the nature of the claim. Primary insurance in

25

the amount of ZAR50 million (approximately $7.5 million at December 28, 2003) is
provided for general liability claims. This insurance contains a ZAR5 million
(approximately $0.8 million at December 28, 2003) deductible. Excess insurance
is provided above the ZAR50 million primary policy with limits up to ZAR250
million (approximately $37.3 million at December 28, 2003). Medical malpractice
claims are insured up to ZAR14.7 million (approximately $2.2 million at December
28, 2003) with a ZAR50,000 deductible (approximately $7,500 at December 28,
2003).

Claims for which we are insured arising from operations in Australia and
New Zealand are covered by policies with varying amounts of coverage depending
on the nature of the claim. For public liability claims, we maintain primary
insurance of AUD$5 million (approximately $3.7 million at December 28, 2003)
with an AUD$250,000 deductible (approximately $0.2 million at December 28,
2003). Medical malpractice claims are insured up to AUD$10 million
(approximately $7.4 million at December 28, 2003) with an AUD$1 million
deductible (approximately $0.7 million at December 28, 2003).

In addition, since the events of September 11, 2001, and due to concerns
over corporate governance and recent corporate accounting scandals, liability
and other types of insurance have become more difficult and costly to obtain.
Unanticipated additional insurance costs could adversely impact our results of
operations and cash flows, and the failure to obtain or maintain any necessary
insurance coverage could have a material adverse effect on our business,
financial condition or results of operations.

We are defending a wage and hour lawsuit filed in California state court by
ten current and former employees. The employees are seeking certification of a
class which would encompass all our current and former California employees in
certain selected posts. Discovery is underway and the court has yet to hear the
plaintiffs' certification motion. We are unable to estimate the potential loss
exposure due to the current procedural posture of the lawsuit. While the
plaintiffs in this case have not quantified their claim of damages and the
outcome of the matters discussed above cannot be predicted with certainty, based
on information known to date, our management believes that the ultimate
resolution of these matters, if settled unfavorably to us, could have a material
adverse effect on our financial position, operating results and cash flows. We
are uninsured for any damages or costs we may incur as a result of this lawsuit,
including the expenses of defending the lawsuit. We are vigorously defending our
rights in this action.

We may not be able to obtain or maintain the insurance levels required by
our government contracts. Our government contracts require us to obtain and
maintain specified insurance levels. The occurrence of any events specific to
our company or to our industry, or a general rise in insurance rates, could
substantially increase our costs of obtaining or maintaining the levels of
insurance required under our government contracts. If we are unable to obtain or
maintain the required insurance levels, our ability to win new government
contracts, renew government contracts that have expired and retain existing
government contracts could be significantly impaired, which could have a
material adverse affect on our business, financial condition and results of
operations.

Our international operations expose us to risks which could materially
adversely affect our financial condition and results of operations. We face
risks associated with our operations outside the U.S. These risks include, among
others, political and economic instability, exchange rate fluctuations, taxes,
duties and the laws or regulations in those foreign jurisdictions in which we
operate. In the event that we experience any difficulties arising from our
operations in foreign markets, our business, financial condition and results of
operations may be materially adversely affected. For the fiscal year ended
December 28, 2003, our international operations accounted for approximately
21.8% of our consolidated revenues.

WE CONDUCT CERTAIN OF OUR OPERATIONS THROUGH JOINT VENTURES, WHICH MAY LEAD TO
DISAGREEMENTS WITH OUR JOINT VENTURE PARTNERS AND ADVERSELY AFFECT OUR
INTEREST IN THE JOINT VENTURES.

We conduct substantially all of our operations in South Africa through
joint ventures with third parties and may enter into additional joint ventures
in the future. Joint venture agreements generally provide that the joint venture
partners will equally share voting control on all significant matters to come
before the joint venture. Our joint venture partners may have interests that are
different from ours which may result in conflicting views as to the conduct of
the business of the joint venture. In the event that we

26

have a disagreement with a joint venture partner as to the resolution of a
particular issue to come before the joint venture, or as to the management or
conduct of the business of the joint venture in general, we may not be able to
resolve such disagreement in our favor and such disagreement could have a
material adverse effect on our interest in the joint venture or the business of
the joint venture in general.

WE ARE DEPENDENT UPON OUR SENIOR MANAGEMENT AND OUR ABILITY TO ATTRACT AND
RETAIN SUFFICIENT QUALIFIED PERSONNEL.

We are dependent upon the continued service of each member of our senior
management team, including George C. Zoley, our Chairman and Chief Executive
Officer, Wayne H. Calabrese, our Vice Chairman and President, and John G.
O'Rourke, our Chief Financial Officer. The unexpected loss of any of these
individuals could materially adversely affect our business, financial condition
or results of operations. We do not maintain key-man life insurance to protect
against the loss of any of these individuals.

In addition, the services we provide are labor-intensive. When we are
awarded a facility management contract or open a new facility, we must hire
operating management, correctional officers and other personnel. The success of
our business requires that we attract, develop and retain these personnel. Our
inability to hire sufficient qualified personnel on a timely basis or the loss
of significant numbers of personnel at existing facilities could have a material
effect on our business, financial condition or results of operations.

OUR PROFITABILITY MAY BE MATERIALLY ADVERSELY AFFECTED BY INFLATION.

Many of our facility management contracts provide for fixed management
fees or fees that increase by only small amounts during their terms. While a
substantial portion of our cost structure is generally fixed, if, due to
inflation or other causes, our operating expenses, such as costs relating to
personnel, utilities, insurance, medical and food, increase at rates faster than
increases, if any, in our facility management fees, then our profitability could
be materially adversely affected.

VARIOUS RISKS ASSOCIATED WITH THE OWNERSHIP OF REAL ESTATE MAY INCREASE COSTS,
EXPOSE US TO UNINSURED LOSSES AND ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

Our ownership of correctional and detention facilities subjects us to
risks typically associated with investments in real estate. Investments in real
estate, and in particular, correctional and detention facilities, are relatively
illiquid and, therefore, our ability to divest ourselves of one or more of our
facilities promptly in response to changed conditions is limited. Investments in
correctional and detention facilities, in particular, subject us to risks
involving potential exposure to environmental liability and uninsured loss. Our
operating costs may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations, as well
as the cost of complying with future legislation. In addition, although we
maintain insurance for many types of losses, there are certain types of losses,
such as losses from earthquakes, riots and acts of terrorism, which may be
either uninsurable or for which it may not be economically feasible to obtain
insurance coverage, in light of the substantial costs associated with such
insurance. As a result, we could lose both our capital invested in, and
anticipated profits from, one or more of the facilities we own. Further, it is
possible to experience losses that may exceed the limits of insurance coverage.

RISKS RELATED TO FACILITY CONSTRUCTION AND DEVELOPMENT ACTIVITIES MAY INCREASE
OUR COSTS RELATED TO SUCH ACTIVITIES.

When we are engaged to perform construction and design services for a
facility, we typically act as the primary contractor and subcontract with other
companies who act as the general contractors. As primary contractor, we are
subject to the various risks associated with construction (including, without
limitation, shortages of labor and materials, work stoppages, labor disputes and
weather interference) which could cause construction delays. In addition, we are
subject to the risk that the general contractor will be unable to complete
construction at the budgeted costs or be unable to fund any excess construction

27

costs, even though we require general contractors to post construction bonds and
insurance. Under such contracts, we are ultimately liable for all late delivery
penalties and cost overruns.

THE RISING COST AND INCREASING DIFFICULTY OF OBTAINING ADEQUATE LEVELS OF
SURETY CREDIT ON FAVORABLE TERMS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

We are often required to post performance bonds issued by a surety
company as a condition to bidding on or being awarded a facility development
contract. Availability and pricing of these surety commitments is subject to
general market and industry conditions, among other factors. Recent events in
the economy have caused the surety market to become unsettled, causing many
reinsurers and sureties to reevaluate their commitment levels and required
returns. As a result, surety bond premiums generally are increasing. If we are
unable to effectively pass along the higher surety costs to our customers, any
increase in surety costs could adversely affect our operating results. In
addition, we may not continue to have access to surety credit or be able to
secure bonds economically, without additional collateral, or at the levels
required for any potential facility development or contract bids. If we are
unable to obtain adequate levels of surety credit on favorable terms, we would
have to rely upon letters of credit under our Senior Credit Facility, which
would entail higher costs even if such borrowing capacity was available when
desired, and our ability to bid for or obtain new contracts could be impaired.

WE MAY NOT BE ABLE TO SUCCESSFULLY TRANSITION KEY SERVICES PREVIOUSLY PROVIDED
BY OUR FORMER PARENT COMPANY, WHICH MAY ADVERSELY AFFECT OUR FINANCIAL
RESULTS.

We have historically been reliant upon TWC for various services including
payroll, tax, data processing, internal auditing, treasury, cash management,
insurance, information technology and human resource services. During 2002, we
transitioned all of these services in-house with the exception of information
technology support services, which TWC provided during 2003 for a fee of $1.8
million. In January 2004, we began handling our information technology support
services internally. If we are unable to capably handle any of these services
previously handled by TWC, or if we handle them less efficiently or on a more
costly basis than what TWC charged us to handle them, our financial results
could be adversely affected.

OUR FORMER INDEPENDENT PUBLIC ACCOUNTANT, ARTHUR ANDERSEN LLP, HAS BEEN FOUND
GUILTY OF FEDERAL OBSTRUCTION OF JUSTICE CHARGES, WHICH MAY PREVENT INVESTORS
IN OUR SECURITIES FROM EXERCISING EFFECTIVE REMEDIES AGAINST SUCH FIRM IN ANY
LEGAL ACTION AND DELAY OUR ACCESS TO THE CAPITAL MARKETS.

Although we dismissed Arthur Andersen in 2002 as our independent public
accountants and engaged Ernst & Young, LLP, our consolidated financial
statements as of December 30, 2001, and for the fiscal year then ended were
audited by Arthur Andersen LLP. On March 14, 2002, Arthur Andersen was indicted
on federal obstruction of justice charges arising from the federal government's
investigation of Enron Corporation. On June 15, 2002, a jury returned with a
guilty verdict against Arthur Andersen following a trial. In light of the jury
verdict and the underlying events, on August 31, 2002 Arthur Andersen ceased
practicing before the SEC. However, certain of the information included in this
report is derived in part from our consolidated financial statements as of and
for the fiscal year ended December 30, 2001, which were audited by Arthur
Andersen.

As a public company, we are required to file with the SEC periodic
financial statements audited or reviewed by an independent public accountant,
including the financial statements we have filed with this report. The SEC has
said that it will continue accepting financial statements audited by Arthur
Andersen on an interim basis so long as a reasonable effort is made to have
Arthur Andersen reissue its reports and to obtain a manually signed accountant's
report from Arthur Andersen. Arthur Andersen has informed us that it is no
longer able to reissue its audit reports because both the partner and the audit
manager who were assigned to our account have left the firm. In addition, Arthur
Andersen is unable to perform procedures to assure the continued accuracy of its
report on our audited financial statements included in this report. Arthur
Andersen will also be unable to perform such procedures or to provide other
information or documents that would customarily be received by us in connection
with financings or other

28

transactions, including consents and "comfort" letters. As a result, we may
encounter delays, additional expense and other difficulties in future
financings. Any resulting delay in accessing or inability to access the public
capital markets could have a material adverse effect on our business, financial
condition or results of operations.

In addition, Statement of Financial Accounting Standards No.
144 -- "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No. 144) addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. SFAS 144 broadens the scope of defining
discontinued operations. Under the provisions of SFAS 144, the identification
and classification of a facility as held for sale or the termination of any of
our material facility management contracts, by expiration or otherwise, would
result in the classification of the operating results of such facility as a
discontinued operation, so long as the financial results can be clearly
identified, and so long as we do not have any significant continuing involvement
in the operations of the component after the disposal or termination
transaction. In the event that we have a discontinued operation in the future
that requires us to present discontinued operations for fiscal years audited by
Arthur Andersen, we would be required to have such fiscal years audited by
another accounting firm as Arthur Andersen is unable to reissue their audit
opinion for those fiscal years. As a result, we may encounter delays, additional
expense and other difficulties in filing registration statements for future
financings. Any resulting delay in accessing or inability to access public
markets could have a material adverse effect on our business, financial
condition or results of operations. In addition, any such required reaudit may
result in changes to our financial statements for such fiscal years.

ITEM 2. PROPERTIES

Formerly, we leased our corporate headquarters office space in Palm Beach
Gardens, Florida, from TWC. Our obligations under this lease were terminated,
July 19, 2003, 10 days after the completion of the share purchase from Group 4
Falck. In April 2003, we relocated our corporate offices to Boca Raton, Florida,
under a new 10-year lease. In addition, we lease office space for our eastern
regional office in Palm Beach Gardens, Florida; our central regional office in
New Braunfels, Texas; and for our western regional office in Carlsbad,
California. We also lease office space for our Australian operations in Sydney,
Australia, and through our overseas affiliates, in Sandton, South Africa.

On April 28, 1998, CPV acquired eight correctional and detention facilities
that we operated. We previously had three common members with CPV on each of our
respective boards of directors. Effective September 9, 2002, we decided with CPV
to no longer have common members serving on our respective boards of directors.
CPV also was granted the fifteen-year right to acquire and lease back future
correctional and detention facilities developed or acquired by us. During fiscal
years 1998, 1999 and 2000, CPV acquired three additional facilities for $109.4
million. There have been no purchase and sale transactions between us and CPV
since the beginning of 2001.

We lease the following facilities from CPV under 10-year operating leases:
(i) Aurora INS Processing Center; (ii) Broward County Work Release Center; (iii)
Central Valley Community Correctional Facility; (iv) Desert View Community
Correctional Facility; (v) Golden State Community Correctional Facility; (vi)
Jena Juvenile Justice Center; (vii) Karnes County Correctional Center; (viii)
Lawton Correctional Facility; (ix) Lea County Correctional Facility; (x)
McFarland Community Correctional Facility and (xi) Queens Private Correctional
Facility. As the lease agreements are subject to contractual lease increases, we
record operating lease expense for these leases on a straight-line basis over
the term of the leases.

We also lease from other non-related parties the following facilities that
we manage: (i) Central Texas Parole Violator Facility; (ii) Coke County Juvenile
Justice Facility; (iii) North Texas Intermediate Sanction Facility; and (iv)
Western Region Detention Facility at San Diego.

29

We own a 72-bed private psychiatric hospital in Fort Lauderdale, Florida,
which we purchased and improved in 1997.

Additionally, we own the following correctional properties: (i) Guadalupe
County Correctional Facility; (ii) Michigan Youth Correctional Facility; (iii)
Rivers Correctional Institution; and (iv) Val Verde Correctional Facility. We
purchased these properties on December 12, 2002 in connection with a refinancing
of our former operating lease facility, for an aggregate purchase price of
approximately $155.0 million. We have mortgaged these properties as security for
our borrowings under the senior Credit Facility.

ITEM 3. LEGAL PROCEEDINGS

We are defending a wage and hour lawsuit filed in California state court by
ten current and former employees. The employees are seeking certification of a
class which would encompass all our current and former California employees in
certain selected posts. Discovery is underway and the court has yet to hear the
plaintiffs' certification motion. We are unable to predict the ultimate outcome
due to the current procedural posture of the lawsuit. While the plaintiffs in
this case have not quantified their claim of damages and the outcome of the
matters discussed above cannot be predicted with certainty, based on information
known to date, our management believes that the ultimate resolution of these
matters, if settled unfavorably to us, could have a material adverse effect on
our financial position, operating results and cash flows. We are uninsured for
any damages or costs we may incur as a result of this lawsuit, including the
expenses of defending the lawsuit. We are vigorously defending our rights in
this action.

The nature of our business exposes us to various types of third-party legal
claims, including, but not limited to, civil rights claims relating to
conditions of confinement and/or mistreatment, sexual misconduct claims brought
by prisoners or detainees, medical malpractice claims, claims relating to
employment matters (including, but not limited to, employment discrimination
claims, union grievances and wage and hour claims), property loss claims,
environmental claims, automobile liability claims, contractual claims and claims
for personal injury or other damages resulting from contact with our facilities,
programs, personnel or prisoners, including damages arising from a prisoner's
escape or from a disturbance or riot at a facility. In addition, our management
contracts generally require us to indemnify the governmental agency against any
damages to which the governmental agency may be subject in connection with such
claims or litigation. We maintain insurance coverage for these types of claims,
except for claims relating to employment matters for which we carry no
insurance. Except for any potential losses related to the wage and hour matter
described above, we do not expect the outcome of any pending legal proceedings
to have material adverse effect on our financial condition, results of
operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At a special meeting on November 18, 2003, our shareholders approved a
change in our corporate name from "Wackenhut Corrections Corporation" to "The
GEO Group, Inc." The name change became effective on November 25, 2003, upon the
filing of an amendment to our articles of incorporation with the Secretary of
State in the state of Florida, where we are incorporated. The name change was
required under the terms of a share purchase agreement signed by us on April 30,
2003, pursuant to which we purchased all 12 million shares of common stock held
by Group 4 Falck, our former majority shareholder. Following the name change our
New York Stock Exchange ticker symbol was changed to "GGI" and our common stock
now trades under that symbol.

The following are the results of the two proposals voted on at the special
meeting: proposal 1 to approve the name change -- 8,615,301 for, 28,810 against
and 7,876 abstentions; and proposal 2 to adjourn the special meeting if there
were insufficient votes for a quorum to provide additional time to solicit
proxies -- 4,338,374 for, 3,139,968 against and 1,173,554 abstentions.

30

PART II

ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on the New York Stock Exchange under the symbol
"GGI." The following table shows the high and low prices for our common stock,
as reported by the New York Stock Exchange, for each of the four quarters of
fiscal years 2003 and 2002. The prices shown have been rounded to the nearest
$1/100. The approximate number of shareholders of record as of February 18,
2004, was 154.

We did not pay any cash dividends on our common stock for fiscal years 2003
and 2002. We intend to retain our earnings to finance the growth and development
of our business and do not anticipate paying cash dividends on our capital stock
in the foreseeable future. Future dividends, if any, will depend, among other
things, on our future earnings, our capital requirements, our financial
condition and on such other factors as our board of directors may consider
relevant. In addition, the indenture governing our Notes and the Senior Credit
Facility also place material restrictions on our ability to pay dividends, which
may further limit us from paying dividends.

On July 9, 2003 we purchased all 12 million shares of our common stock.
beneficially owned by Group 4 Falck, our former 57% majority shareholder, for
$132.0 million in cash pursuant to the terms of the share purchase agreement.

We did not buy back any of our common stock during 2002.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information about our common stock that may
be issued upon the exercise of options, warrants and rights under all of our
equity compensation plans as of December 28, 2003, including our 1994 Stock
Option Plan, our 1994 Second Stock Option Plan, our 1999 Stock Option Plan, and
our Non-Employee Director Stock Option Plan. Our shareholders have approved all
of these plans.

RECENT SALES OF UNREGISTERED SECURITIES

To facilitate the completion of the share purchase from Group 4 Falck, on
July 9, 2003, we issued $150.0 million aggregate principal amount ten-year
8 1/4% senior notes, referred to as the Notes, in a private offering to
qualified institutional buyers under Rule 144A of the Securities Act.

31

Subsequent to the private offering of the Notes, we filed an S-4
registration statement to register under the Securities Act of 1933 exchange
notes, referred to as the Exchange Notes having substantially identical terms as
the Notes. The registration statement was declared effective by the SEC on
November 10, 2003. We then completed an exchange offer pursuant to the
registration statement, in which holders of the Notes exchanged the Notes for
Exchange Notes which are generally freely tradable, subject to certain
exceptions.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data should be read in conjunction with
our consolidated financial statements and the notes to the consolidated
financial statements.

- ---------------

(1) Our fiscal year ends on the Sunday closest to the calendar year end.

(2) Compensated resident days are calculated as follows: (a) for per diem rate
facilities -- the number of beds occupied by residents on a daily basis
during the fiscal year; and, (b) for fixed rate facilities -- the design
capacity of the facility multiplied by the number of days the facility was
in operation during the fiscal year. Amounts exclude compensated resident
days for United Kingdom and South African facilities.

(1) Does not include facilities for which we have been notified that the
management contract has not been renewed

32

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTRODUCTION

The following discussion and analysis provides information which our
management believes is relevant to an assessment and understanding of our
consolidated results of operations and financial condition. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of numerous factors including, but not
limited to, those described under Item 1 "Business -- Risks Related to Our High
Level of Indebtedness, Risks Related to Our Business and Industry and
Forward-Looking Statements." The discussion should be read in conjunction with
the consolidated financial statements and notes thereto.

OVERVIEW

We are a leading provider of government-outsourced services specializing in
the management of correctional, detention and mental health facilities. Our
services primarily involve the outsourced management of correctional and
detention facilities for federal agencies and state and local governments. We
manage all aspects of a prison's operations, including security, food services,
work programs, educational programs and health services. In addition to
management services, we have the internal capability to design and develop new
correctional facilities. We believe our expertise in operating correctional
facilities combined with our capabilities to design and develop facilities
strategically position us to win new contracts. Our service offerings also
include the management of a state and a private mental health hospital.

SHARE PURCHASE

On April 30, 2003, we entered into a share purchase agreement with Grou 4
Falck A/S, our former majority shareholder which we refer to as Group 4 Falck,
to purchase all 12,000,000 shares of our common stock held by Group 4 Falck for
$132.0 million in cash. Group 4 Falck obtained these shares when it acquired our
former parent company, The Wackenhut Corporation, which we refer to as TWC, in
2002. We completed the share purchase on July 9, 2003.

RECENT FINANCINGS

In connection with the share purchase, we completed two financing
transactions on July 9, 2003. First, we amended our former senior credit
facility. The amended $150.0 million senior credit facility, which we refer to
as the Senior Credit Facility, consists of a $50.0 million, five-year revolving
credit facility, with a $40.0 million sub limit for letters of credit, and a
$100.0 million, six-year term loan. Second, we offered and sold $150.0 million
aggregate principal amount of 8 1/4% senior notes due 2013, which we refer to as
the Notes.

SALE OF OUR JOINT VENTURE INTEREST IN PREMIER CUSTODIAL GROUP LIMITED

On July 2, 2003, we sold our one-half interest in Premier Custodial Group
Limited, our United Kingdom joint venture, which we refer to as PCG, to Serco
Investments Limited, our former joint venture partner, which we refer to as
Serco, for approximately $80.7 million, on a pretax basis. Under the terms of
the indenture governing the Notes, we have an obligation to use the proceeds
from the sale of our interest in PCG to reinvest in certain permitted businesses
or assets, to repay indebtedness outstanding under the Senior Credit Facility or
to make an offer to repurchase the Notes.

LOSS OF CONTRACT WITH THE AUSTRALIA DEPARTMENT OF IMMIGRATION, MULTICULTURAL
AND INDIGENOUS AFFAIRS

In Australia, the Department of Immigration, Multicultural and Indigenous
Affairs, which we refer to as DIMIA, entered into a contract in 2003 with a
division of Group 4 Falck for the management and operation of Australia's
immigration centers, services which we have provided since 1997 through our

33

Australian subsidiary. We transitioned the management and operation of the DIMIA
centers to the division of Group 4 Falck February 29, 2004. For the year ended
December 28, 2003 DIMIA represented approximately 9.9% of our consolidated
revenues. We do not have any lease obligations related to our contract with
DIMIA. During 2003, we increased reserves approximately $3.6 million for
liability insurance obligations related to the expiration of the DIMIA contract.

NAME CHANGE

On November 25, 2003, our corporate name was changed from "Wackenhut
Corrections Corporation" to "The GEO Group, Inc." The name change was required
under the terms of the share purchase agreement between us and Group 4 Falck
referred to above. Under the terms of the share purchase agreement, GEO is
required to cease using the name, trademark and service mark "Wackenhut" by July
9, 2004. In addition to achieving compliance with the terms of the share
purchase agreement, we believe that the change in our name to "The GEO Group,
Inc." will help reinforce the fact that we are no longer affiliated with TWC or
Group 4 Falck or their related entities. Following the name change, our New York
Stock Exchange ticker symbol was changed to "GGI" and our common stock now
trades under that symbol.

RESULTS OF RE-BIDS ON MANAGEMENT CONTRACTS IN TEXAS

As a result of a re-bidding process in Texas on several state management
contracts which expired in January 2004, we were recently awarded management
contracts by the Texas Department of Criminal Justice for the continued
operation of two facilities which we currently operate -- the Cleveland
Correctional Center facility and the Lockhart Secure Work Program Facility. We
were also awarded the management contract to operate a new facility, the Sanders
Estes Correctional Center. However, our existing management contracts to operate
the Willacy State Jail and the John R. Lindsey State Jail were not renewed.
Although the net impact of the Texas re-bid process will result in the overall
loss of one management contract, we do not believe that this will have a
material impact on our future financial performance. The contract awards became
effective on January 16, 2004 and we began the operation of the Sanders Estes
Correctional Center on that date.

RIGHTS AGREEMENT

On October 9, 2003, we entered into a rights agreement with EquiServe Trust
Company, N.A., as rights agent. Under the terms of the rights agreement, each
share of our common stock carries with it one preferred share purchase right. If
the rights become exercisable pursuant to the rights agreement, each right
entitles the registered holder to purchase from us one one-thousandth of a share
of Series A Junior Participating Preferred Stock at a fixed price, subject to
adjustment. Until a right is exercised, the holder of the right has no right to
vote or receive dividends or any other rights as a shareholder as a result of
holding the right. The rights trade automatically with shares of our common
stock, and may only be exercised in connection with certain attempts to take
over our company. The rights are designed to protect the interests of our
company and our shareholders against coercive takeover tactics and encourage
potential acquirors to negotiate with our board of directors before attempting a
takeover. The rights may, but are not intended to, deter takeover proposals that
may be in the interests of our shareholders.

SHELF REGISTRATION STATEMENT

On January 28, 2004, our universal shelf registration statement on Form S-3
was declared effective by the Securities and Exchange Commission, which we refer
to as the SEC. The universal shelf registration statement provides for the offer
and sale by us, from time to time, on a delayed basis, of up to $200.0 million
aggregate amount of our common stock, preferred stock, debt securities,
warrants, and/or depositary shares. These securities, which may be offered in
one or more offerings and in any combination, will in each case be offered
pursuant to a separate prospectus supplement issued at the time of the
particular offering that will describe the specific types, amounts, prices and
terms of the offered securities. Unless otherwise described in the applicable
prospectus supplement relating to the offered securities, we

34

anticipate using the net proceeds of each offering for general corporate
purposes, including debt repayment, capital expenditures, acquisitions, business
expansion, investments in subsidiaries or affiliates, and/or working capital.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. We routinely evaluate our estimates based on
historical experience and on various other assumptions that our management
believes are reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions. If actual results
significantly differ from our estimates, our financial condition and results of
operations could be materially impacted.

We believe that the accounting policies described below are critical to
understanding our business, results of operations and financial condition
because they involve the more significant judgments and estimates used in the
preparation of our consolidated financial statements. We have discussed the
development, selection and application of our critical accounting policies with
the audit committee of our board of directors, and our audit committee has
reviewed our disclosure relating to our critical accounting policies in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Other significant accounting policies, primarily those with lower levels of
uncertainty than those discussed below, are also critical to understanding our
consolidated financial statements. The notes to our consolidated financial
statements contain additional information related to our accounting policies and
should be read in conjunction with this discussion.

REVENUE RECOGNITION

In accordance with Commission Staff Accounting Bulletin No. 101, as amended
by Staff Accounting Bulletin No. 104, and related interpretations, facility
management revenues are recognized as services are provided under facility
management contracts with approved government appropriations based on a net rate
per day per inmate or on a fixed monthly rate. Project development and design
revenues are recognized as earned on a percentage of completion basis measured
by the percentage of costs incurred to date as compared to estimated total cost
for each contract. This method is used because our management considers costs
incurred to date to be the best available measure of progress on these
contracts. Provisions for estimated losses on uncompleted contracts and changes
to cost estimates are made in the period in which we determine that such losses
and changes are probable. Contract costs include all direct material and labor
costs and those indirect costs related to contract performance. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to estimated costs and income, and are recognized in the
period in which the revisions are determined.

We extend credit to the governmental agencies contracted with and other
parties in the normal course of business as a result of billing and receiving
payment for services thirty to sixty days in arrears. Further, we regularly
review outstanding receivables, and provide estimated losses through an
allowance for doubtful accounts. In evaluating the level of established
reserves, we make judgments regarding our customers' ability to make required
payments, economic events and other factors. As the financial condition of these
parties change, circumstances develop or additional information becomes
available, adjustments to the allowance for doubtful accounts may be required.

Property and Equipment

As of December 28, 2003, we had approximately $201.5 million in long-lived
property and equipment. Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over

35

the estimated useful life. Leasehold improvements are amortized on a
straight-line basis over the shorter of the useful life of the improvement or
the term of the lease. We perform ongoing evaluations of the estimated useful
lives of our property and equipment for depreciation purposes. The estimated
useful life is determined and continually evaluated based on the period over
which services are expected to be rendered by the asset. Maintenance and repair
items are expensed as incurred.

We review for impairment of long-lived assets to be held and used whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable. Determination of recoverability is based on
an estimate of undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. Measurement of an impairment loss for
long-lived assets that management expects to hold and use is based on the fair
value of the asset. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value less costs to sell. Our management has
reviewed our long-lived assets and determined that there are no events requiring
impairment loss recognition. Events that would trigger an impairment assessment
include deterioration of profits for a business segment that has long-lived
assets, or when other changes occur which might impair recovery of long-lived
assets.

Income Taxes

Deferred tax assets and liabilities are recognized as the difference
between the book basis and tax basis of its net assets. At December 28, 2003, we
had net deferred tax assets of approximately $16.8 million. In providing for
deferred taxes, we consider tax regulations of the jurisdictions in which we
operate, estimates of future taxable income and available tax planning
strategies. If tax regulations, operating results or the ability to implement
tax-planning strategies vary, adjustments to the carrying value of deferred tax
assets and liabilities may be required.

Reserves for Insurance Losses

Claims for which we are insured arising from our U.S. operations that have
an occurrence date of October 1, 2002 or earlier are handled by TWC and are
fully insured up to an aggregate limit of between $25.0 million and $50.0
million, depending on the nature of the claim. With respect to claims for which
we are insured arising from our U.S. operations that have an occurrence date of
October 2, 2002 or later, our coverage varies depending on the nature of the
claim. For claims relating to general liability and automobile liability, we
have a deductible of $1.0 million per claim, primary coverage of $5.0 million
per claim for general liability and $3.0 million per claim for automobile
liability (up to a limit of $20.0 million for all claims in the aggregate), and
excess/umbrella coverage of up to $50.0 million per claim and for all claims in
the aggregate. For claims relating to medical malpractice at our correctional
facilities, we have a deductible of $1.0 million per claim and primary coverage
of $5.0 million per claim (up to a limit of $5.0 million for all claims in the
aggregate). For claims relating to medical malpractice at our mental health
facilities, we have a deductible of $2.0 million per claim and primary coverage
of up to $5.0 million per claim and for all claims in the aggregate. The current
professional liability policy for our mental health facilities does not include
tail coverage for prior periods. For claims relating to workers' compensation,
we maintain statutory coverage as determined by state and/or local law and, as a
result, our coverage varies among the various jurisdictions in which we operate.
We carry no insurance for claims relating to employment matters. We also carry
various types of insurance with respect to our operations in South Africa,
Australia and New Zealand. Because our insurance policies have high deductible
amounts, losses are recorded as reported and a provision is made to cover losses
incurred but not reported. Loss reserves are undiscounted and are computed based
on independent actuarial studies. We use judgments in assessing loss estimates
that are based on actual claim amounts and loss development experience
considering historical and industry experience. If actual losses related to
insurance claims significantly differ from our estimates, our financial
condition and results of operations could be materially impacted.

36

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our
consolidated financial statements and the notes to the consolidated financial
statements.

FISCAL 2003 COMPARED WITH 2002

Revenues increased by 8.6% to $617.5 million in 2003 from $568.6 million in
2002. The strengthening of the Australian dollar by approximately 20 percent
during 2003 resulted in approximately a $22.9 million increase in revenues.
Revenues also increased approximately $14.8 million as a result of the opening
of the Lawrenceville Correctional Facility at the end of the first quarter 2003.
The remainder of the increase was due to contractual adjustments for inflation,
slightly higher occupancy rates and improved terms negotiated into a number of
contracts. These increases were partially reduced by approximately $6.3 million
in 2003 compared to 2002 due to the closure of the Bayamon Correctional Facility
and Southbay -- SVP.

The number of compensated resident days in domestic facilities increased to
9.8 million in 2003 from 9.2 million in 2002. The average facility occupancy in
domestic facilities was 100% of capacity in 2003 compared to 98.5% in 2002.
Compensated resident days in Australian facilities during 2003 decreased to 1.5
million from 1.7 million for the comparable periods in 2002 primarily due to
lower population levels at the immigration and detention centers.

In Australia, the Department of Immigration, Multicultural and Indigenous
Affairs, which we refer to as DIMIA, recently entered into a contract with a
division of Group 4 Falck for the management and operation of Australia's
immigration centers, services which we have provided since 1997 through our
Australian subsidiary. We fully transitioned the management and operation of the
DIMIA centers to the division of Group 4 Falck effective February 29, 2004. For
the year ended December 28, 2003, DIMIA represented approximately 9.9% of our
consolidated revenues.

Operating expenses increased by 7.2% to $532.4 million in 2003 compared to
$496.5 million in 2002. As a percentage of revenues, operating expenses
decreased to 86.2% in 2003 from 87.3% in 2002. The increase in operating expense
reflects an additional provision for operating loss of approximately $5 million
during 2003 related to our inactive facility in Jena, Louisiana. During third
quarter 2003, parties that we previously believed might sublease the Jena
facility prior to early 2004 either indicated that they did not have an
immediate need for the facility or did not enter into a binding commitment for a
sublease of the facility. As a result, we have determined that it is unlikely
that we will sublease the facility or find an alternative correctional use for
the facility prior to the expiration of the provision for anticipated loss
through early 2004 and we have incurred an additional provision for operating
loss. This additional operating charge both covers our anticipated losses under
the lease for the facility until a sublease is in place and provides an
estimated discount to sublease the facility to prospective sublessees. We are
continuing our efforts to find a sublease or alternative correctional use for
the facility. If we are unable to sublease or find an alternative correctional
use for the facility prior to January 2006, an additional operating charge will
be required. As of December 28, 2003, the remaining obligation on the Jena lease
through the contractual term of 2009, exclusive of the reserve for losses
through early 2006, was approximately $7.0 million.

The increase in operating expenses in 2003 also reflects increased costs of
approximately $3.5 million related to the transitioning of the DIMIA contract to
the division of Group 4 Falck, primarily related to liability insurance
expenses. We may incur additional costs related to the transition in the future.
We do not have any lease obligations related to our contract with DIMIA.

Increased operating expenses in 2003 were also attributable to the opening
of the Lawrenceville Correctional Facility and the impact of the stronger
Australian dollar offset by lower workers' compensation and general liability
insurance expense and lower lease expense as a result of purchasing previously
leased properties.

Depreciation and amortization increased by 15.6% to $14.0 million in 2003
from $12.1 million in 2002. As a percentage of revenues, depreciation and
amortization increased to 2.3% in 2003 from 2.1% in

37

2002. This increase is primarily attributable to the purchase of previously
leased facilities for approximately $155.0 million in December 2002.

General and administrative expenses increased by 22.5% to $39.4 million in
2003 from $32.1 million in 2002. As a percentage of revenues, general and
administrative expenses increased to 6.4% in 2003 from 5.7% in 2002. The
increase primarily relates to increased deferred compensation costs for senior
executive compensation agreements as well as payments under employment
agreements with certain key executives triggered by the change in control from
the sale of TWC in May 2002 as well as increased professional fees, directors'
and officers' insurance and travel costs.

Operating income increased by 13.9% to $31.8 million in 2003 from $27.9
million in 2002. As a percentage of revenues, operating income increased to 5.1%
in 2003 from 4.9% in 2002 due to the factors discussed above.

Interest income increased 38.7% to $6.7 million in 2003 from $4.8 million
in 2002. This increase is primarily due to higher average invested cash
balances.

Interest expense was $17.9 million in 2003 compared to $3.7 million in
2002. This increase is attributable to the debt incurred to finance the purchase
of previously leased facilities for approximately $155.0 million in December
2002. In addition, during 2003, we entered into the Senior Credit Facility and
issued the Notes.

We incurred a charge of approximately $2.0 million for the write-off of
deferred financing fees related to the amendment of our previous credit
agreement in July 2003.

On July 2, 2003, we sold our one-half interest in Premier Custodial Group
Limited, our United Kingdom joint venture, which we refer to as PCG, to Serco
Investments Limited, our former joint venture partner, which we refer to as
Serco, for approximately $80.7 million. We recognized a pre-tax gain of
approximately $61.0 million from the sale of PCG.

Provision for income taxes increased to $37.3 million in 2003 as compared
to $12.7 million in 2002 primarily due to the tax effect on the gain on sale of
PCG in July 2003.

Equity in earnings of affiliates, net of income tax provision, decreased to
$3.0 million in 2003 as compared to $5.2 million in 2002 due to the sale of PCG.

Net income increased to $45.3 million in 2003 from $21.5 million in 2002 as
a result of the factors described above.

FISCAL 2002 COMPARED WITH 2001

Revenues increased $6.5 million or 1.2% to $568.6 million in 2002 from
$562.1 million in 2001. The increase in revenues is the result of new facility
openings and increases in per diem rates offset by lower construction revenues
and the closure of a number of facilities. Specifically, revenues increased
approximately $27.4 million in 2002 compared to 2001 due to increased
compensated resident days at a number of our domestic facilities, including, but
not limited to, the facilities opened in 2001, Val Verde Correctional Facility,
Del Rio, Texas and the Rivers Correctional Institution, Winton, North Carolina
and an overall increase in per diem rates. Revenues decreased by approximately
$9.4 million in 2002 compared to 2001 due to the decline in construction
revenues. Offsetting the increase, revenues were reduced by approximately $11.5
million in 2002 compared to 2001 due to the expiration of our contracts with the
Arkansas Board of Correction and Community Punishment in 2001 and the expiration
of the Bayamon Correctional Facility contract in June 2002.

The number of compensated resident days in domestic facilities remained
constant at 9.2 million for 2002 and 2001. Average facility occupancy in
domestic facilities increased to 98.5% in 2002 from 97% in 2001. Compensated
resident days in Australian facilities decreased to 1.7 million in 2002 from 1.9
million in 2001 primarily due to lower population levels at the immigration and
detention centers. Average facility

38

occupancy in Australian facilities decreased to 91.4% in 2002 from 94.3% in
2001, based on a reduction of detainees at our immigration and detention
facilities.

Operating expenses decreased by 1.4% to $496.5 million in 2002 compared to
$503.5 million in 2001. As a percentage of revenues, operating expenses
decreased to 87.3% in 2002 from 89.6% in 2001. This decrease primarily reflects
the absence of $3.5 million in start-up costs related to the opening of the Val
Verde, Texas and Winton, North Carolina facilities in 2001, as well as
approximately $9.2 million due to the completion of construction activities in
2001, and approximately $11.3 million due to the expiration of the contracts
with the Arkansas Board of Correction and Community Punishment and Bayamon
Correctional Facility and a decrease in expenses related to our operating lease
facility, which was refinanced on December 12, 2002. Also during 2002, our
allowance for doubtful accounts decreased approximately $0.9 million as a result
of charge-offs related to uncollectible accounts for receivables at our
psychiatric hospital. During 2002, we recognized approximately $1.4 million in
expense for uninsured legal claims, approximately $0.6 million for reserves
related to certain contractual obligations and approximately $0.4 million
related to performance penalties under certain of our operating contracts.
During 2001, we recognized approximately $0.3 million for uninsured legal
claims, approximately $0.1 million for reserves related to certain contractual
obligations and approximately $0.3 million related to performance penalties
under certain of our operating contracts which had been provided for in 2000.
Additionally, there are a number of secondary factors contributing to operating
expenses in 2002 as compared to 2001 which include the following: lease expense
for payments made to CPV of $21.3 million offset by $1.8 million in amortization
of the deferred revenue from the sale of properties to CPV.

During 2000, our management contract at the 276-bed Jena Juvenile Justice
Center in Jena, Louisiana was terminated by the mutual agreement of the parties.
Despite the discontinuation of the management contract, we remain responsible
for payments on our underlying lease of the inactive facility. We incurred
operating charges of $1.1 million and $3.0 million during fiscal years 2002 and
2001, respectively, related to our lease of the inactive facility that
represented the expected costs to be incurred under the lease until a sublease
or alternative correctional use could be initiated. During 2003, parties that we
believed might sublease the facility prior to early 2004 either indicated that
they did not have an immediate need for the facility or did not enter into a
binding commitment for a sublease of the facility. As a result, our management
determined that it was unlikely that we would sublease the facility or find an
alternative correctional use for the facility prior to the expiration of the
provision for anticipated loss though early 2004 and we incurred an additional
provision for operating charge of $5.0 million during 2003. This additional
operating charge both covers our anticipated losses under the lease for the
facility until a sublease is in place and provides us with an estimated discount
to sublease the facility to prospective sublessees. We are continuing our
efforts to find a sublease or alternative correctional use for the facility. If
we are unable to sublease or find an alternative correctional use for the
facility prior to January 2006, an additional operating charge will be required.
As of December 28, 2003, the remaining obligation on the Jena lease through the
contractual term of 2009, exclusive of the reserve for losses through early
2006, is approximately $7.0 million.

Depreciation and amortization increased by 21.9% to $12.1 million in 2002
from $9.9 million in 2001 due to the newly operational facilities in 2002, the
addition of the four facilities as a result of the refinancing of our operating
lease facility and incremental depreciation due to assets acquired in our
development of the internal support structure previously provided by TWC. As a
percentage of revenues, depreciation and amortization increased to 2.1% in 2002
from 1.8% in 2001.

General and administrative expenses increased 31.6% to $32.1 million in
2002 from $24.4 million in 2001. As a percentage of revenues, general and
administrative expenses increased to 5.7% in 2002 from 4.3% in 2001. The
increase was primarily driven by $1.9 million of payments under employment
agreements with certain key executives triggered by the change in control from
the sale of TWC as well as $0.6 million of expense due to an acceleration of the
retirement age under the senior executive deferred compensation plans, also a
result of the sale of TWC. Other factors impacting the increase were increased
legal and professional fees of approximately $2.0 million, higher insurance
costs of approximately $1.2 million and higher travel costs of approximately
$0.4 million.

39

Related party transactions occurred in the past in the normal course of
business between us and TWC. Such transactions included the purchase of goods
and services and corporate costs for information technology support, office
space and interest expense. Total related party transaction costs with TWC,
excluding casualty insurance, were approximately $3.1 million and $3.2 million
in 2002 and 2001, respectively. Casualty insurance related to workers'
compensation, general liability and automobile insurance coverage is provided
through an independent insurer. Prior to October 2, 2002, the first $1.0 million
of coverage was reinsured by an insurance subsidiary of TWC. We paid TWC a fee
for the transfer of the deductible exposure. We paid casualty insurance premiums
related to this program of approximately $18.0 million for coverage through the
end of the third quarter for the fiscal year ended December 29, 2002, as
compared to approximately $22.0 million for coverage during the full fiscal year
ended December 30, 2001. Effective October 2, 2002, we established a new
insurance program with a $1.0 million deductible per occurrence for covered
claims with an independent insurer. Prior to the establishment of the new high
deductible policy, we had not recognized any expense related to self-insurance.
We recognized approximately $3.0 million of self-insurance expense for estimated
losses related to the high deductible policy during the fourth quarter of the
fiscal year ended December 29, 2002 related to this new program.

Since January 1, 2003, the only services TWC has provided for us have been
information technology support services, which they ceased providing on December
31, 2003. We also formerly leased office space from TWC under a non-cancelable
operating lease that expires February 11, 2011. On April 14, 2003, we relocated
our corporate headquarters to Boca Raton, Florida under a ten-year lease for new
office space. Upon the completion of the share purchase with Group 4 Falck in
July 2003, the lease with TWC for our former corporate headquarters terminated
and we have no further obligations under that lease. In addition, upon the
closing of the share purchase, an agreement between us and Group 4 Falck,
whereby Group 4 Falck agreed to reimburse us for up to 10% of the fair market
value of our interest in PCG under certain circumstances, was terminated.

Operating income increased by 15.3% to $27.9 million in 2002 from $24.2
million in 2001. As a percentage of revenues, operating income increased to 4.9%
in 2002 from 4.3% in 2001 due to the factors impacting contribution from
operations described above.

Interest income increased 12.1% to $4.8 million in 2002 from $4.3 million
in 2001. This increase is primarily due to higher average invested cash
balances.

Interest expense increased slightly to $3.7 million in 2002 from $3.6
million in 2001 reflecting higher effective interest rates as a result of the
refinancing completed on December 12, 2002.

Income before income taxes and equity in earnings of affiliates, increased
to $28.9 million in 2002 from $24.9 million in 2001 due to the factors described
previously.

Provision for income taxes increased to $12.7 million in 2002 from $9.7
million in 2001 due to the increase in income before income taxes and a higher
effective tax rate. The higher effective tax rate reflects an increase in the
tax provision to provide for higher additional taxes due to the disallowance of
certain expenses resulting from the sale of TWC.

Equity in earnings of affiliates, net of income tax provision, increased
23.7% to $5.2 million in 2002 from $4.2 million in 2001. Fiscal year 2001
reflects start-up costs associated with the opening of the 800-bed Dovegate
prison in the United Kingdom, in July 2001, and the opening of the 150-bed
Dungavel House Immigration Detention Centre in the United Kingdom, in August
2001. Fiscal year 2002 reflects the full activation of these facilities offset
by start-up costs and phase-in losses related to the 3,024-bed South African
prison, which opened in February 2002. Additionally, performance issues at the
Ashfield Facility negatively impacted 2002 results.

Net income increased 10.9% to $21.5 million in 2002 from $19.4 million in
2001 as a result of the factors described above.

40

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of liquidity is cash flow from operations and borrowings
under the $50.0 million revolving portion of our Senior Credit Facility. We
expect that ongoing requirements for debt service and capital expenditures will
be funded from these sources. As of December 28, 2003, we had $25.5 million
available for borrowing under the revolving portion of our Senior Credit
Facility.

We incurred substantial indebtedness in connection with the share purchase.
As of December 28, 2003, we had $248.8 million of consolidated long-term debt
outstanding, excluding $43.9 million of non recourse debt. As of December 28,
2003, we also had outstanding eleven letters of guarantee totaling approximately
$6.7 million under separate international credit facilities. Our significant
debt service obligations could, under certain circumstances, have material
consequences for you. See "Risk Factors -- Risks Related to Our High Level of
Indebtedness."

The Senior Credit Facility

The Senior Credit Facility consists of a $50.0 million, five-year revolving
loan, referred to as the Revolving Credit Facility, and a $100.0 million,
six-year term loan, referred to as the Term Loan Facility. The Revolving Credit
Facility contains a $40.0 million sub limit for the issuance of standby letters
of credit. On February 20, 2004, we amended the Senior Credit Facility to, among
other things, reduce the interest rates applicable to borrowings under the
Senior Credit Facility, give us the flexibility to make certain information
technology related capital expenditures and provide us with additional time to
reinvest the proceeds from the sale of PCG. At December 28, 2003, we had
borrowings of $98.8 million outstanding under the Term Loan Facility, no amounts
outstanding under the Revolving Credit Facility, and $24.5 million outstanding
in letters of credit under the Revolving Credit Facility. As of March 5, 2004,
we had borrowings of $97.5 million outstanding under the Term Loan Facility and
$7.5 million outstanding under the Revolving Credit Facility.

All of the obligations under the Senior Credit Facility are unconditionally
guaranteed by each of our existing material domestic subsidiaries. The Senior
Credit Facility and the related guarantees are secured by substantially all of
our present and future tangible and intangible assets and all present and future
tangible and intangible assets of each guarantor, including but not limited to
(i) a first-priority pledge of all of the outstanding capital stock owned by us
and each guarantor, and (ii) perfected first-priority security interests in all
of our present and future tangible and intangible assets and the present and
future tangible and intangible assets of each guarantor.

Indebtedness under the Revolving Credit Facility portion of the Senior
Credit Facility bears interest at our option at the base rate plus a spread
varying from 0.75% to 1.50% (depending upon a leverage-based pricing grid set
forth in the Senior Credit Facility, or at the London inter-bank offered rate
("LIBOR") plus a spread, varying from 2.00% to 2.75% (depending upon a
leverage-based pricing grid, as defined in the Senior Credit Facility).
Borrowings under the Revolving Credit Facility currently bear interest at LIBOR
plus a spread of 2.5%. The Term Loan Facility bears interest at our option at
the base rate plus a spread of 1.25%, or at LIBOR plus a spread of 2.5%.
Borrowings under the Term Loan Facility currently bear interest at LIBOR plus
2.5%. If an event of default occurs under the Senior Credit Facility (i) all
LIBOR rate loans bear interest at the rate which is 2.0% in excess of the rate
then applicable to LIBOR rate loans until the end of the applicable interest
period and thereafter at a rate which is 2.0% in excess of the rate then
applicable to base rate loans, and (ii) all base rate loans bear interest at a
rate which is 2.0% in excess of the rate then applicable to base rate loans.

The Senior Credit Facility contains financial covenants which require us to
maintain the following ratios, as computed at the end of each fiscal quarter for
the immediately preceding four quarter-period: a total leverage ratio equal to
or less than 3.50 to 1.00 through March 27, 2004, which reduces thereafter in
0.25 increments to 2.50 to 1.00 on July 2, 2006 and thereafter; a senior secured
leverage ratio equal to or less than 1.75 to 1.00 through September 25, 2004,
which reduces thereafter to 1.50 to 1.00; and a fixed

41

charge coverage ratio equal to or greater than 1.10 to 1.00. In addition, the
Senior Credit Facility prohibits us from making capital expenditures greater
than $10.0 million in the aggregate during any fiscal year, provided that to the
extent that our capital expenditures during any fiscal year are less than the
$10.0 million limit, such amount will be added to the maximum amount of capital
expenditures that we can make in the following year and further provided that
certain information technology related upgrades made prior to the end of 2005
will not count against the annual limit on capital expenditures.

The Senior Credit Facility also requires us to maintain a minimum net
worth, as computed at the end of each fiscal quarter for the immediately
preceding four quarter-period, equal to $140.0 million, plus the amount of the
net gain from the sale of our interest in PCG, which is approximately $32.7
million, minus the $132.0 million we used to complete the share purchase from
Group 4 Falck, plus 50% of our consolidated net income earned during each full
fiscal quarter ending after the date of the Senior Credit Facility, plus 50% of
the aggregate increases in our consolidated shareholders' equity that are
attributable to the issuance and sale of equity interests by us or any of our
restricted subsidiaries (excluding intercompany issuances).

The Senior Credit Facility contains certain customary representations and
warranties, and certain customary covenants that restrict our ability to, among
other things (i) create, incur or assume any indebtedness, (ii) incur liens,
(iii) make loans and investments, (iv) engage in mergers, acquisitions and asset
sales, (v) sell our assets, (vi) make certain restricted payments, including
declaring any cash dividends or redeem or repurchase capital stock, except as
otherwise permitted, (vii) issue, sell or otherwise dispose of our capital
stock, (viii) transact with affiliates, (ix) make changes to our accounting
treatment, (x) amend or modify the terms of any subordinated indebtedness
(including the Notes), (xi) enter into debt agreements that contain negative
pledges on our assets or covenants more restrictive than contained in the Senior
Credit Facility, (xii) alter the business we conduct, and (xiii) materially
impair our lenders' security interests in the collateral for our loans. The
covenants in the Senior Credit Facility can substantially restrict our business
operations. See "Risk Factors -- Risks Related to Our High Level of
Indebtedness -- The covenants in the indenture governing the Notes and our
Senior Credit Facility impose significant operating and financial restrictions
which may adversely affect our ability to operate our business."

Events of default under the Senior Credit Facility include, but are not
limited to, (i) our failure to pay principal or interest when due, (ii) our
material breach of any representations or warranty, (iii) covenant defaults,
(iv) bankruptcy, (v) cross default to certain other indebtedness, (vi)
unsatisfied final judgments over a threshold to be determined, (vii) material
environmental claims which are asserted against us, and (viii) a change of
control.

Senior 8 1/4% Notes

To facilitate the completion of the share purchase from Group 4 Falck, we
issued $150.0 million aggregate principal amount ten-year 8 1/4% senior notes,
referred to as the Notes, in a private offering to qualified institutional
buyers under Rule 144A of the Securities Act.

The Notes are general, unsecured, senior obligations. Interest is payable
semi-annually on January 15 and July 15 at 8.25%, beginning on January 15, 2004.
The Notes are governed by the terms of an Indenture, dated July 9, 2003, between
us and the Bank of New York, as trustee, referred to as the Indenture. Under the
terms of the Indenture, at any time on or prior to July 15, 2006, we may redeem
up to 35% of the Notes with the proceeds from equity offerings at 108.25% of the
principal amount to be redeemed plus the payment of accrued and unpaid interest,
and any applicable liquidated damages. Additionally, after July 15, 2008, we may
redeem, at our option, all or a portion of the Notes plus accrued and unpaid
interest at various redemption prices ranging from 104.125% to 100.000% of the
principal amount to be redeemed, depending on when the redemption occurs. The
Indenture contains covenants that limit our ability to incur additional
indebtedness, pay dividends or distributions on our common stock, or repurchase
our common stock, or prepay subordinated indebtedness. The Indenture also limits
our ability to issue preferred stock, make certain types of investments, merge
or consolidate with another company,

42

guarantee other indebtedness, create liens and transfer and sell assets. We were
in compliance with all of the covenants of the Notes as of December 28, 2003.
Under the terms of the indenture governing the Notes, we have an obligation to
use the proceeds from the sale of its interest in the UK joint venture in the
amount of $52.0 million by June 28, 2004 to reinvest in certain permitted
businesses or assets, to repay indebtedness outstanding under the amended senior
credit facility or to make an offer to repurchase the Notes.

The covenants in the Indenture can substantially restrict our business
operations. See "Risk Factors -- Risks Related to Our High Level of
Indebtedness -- The covenants in the indenture governing the Notes and our
Senior Credit Facility impose significant operating and financial restrictions
which may adversely affect our ability to operate our business."

Subsequent to the private offering of the Notes, we filed an S-4
registration statement to register under the Securities Act of 1933 exchange
notes, referred to as the Exchange Notes having substantially identical terms as
the Notes. The registration statement was declared effective by the SEC on
November 10, 2003. We then completed an exchange offer pursuant to the
registration statement, in which holders of the Notes exchanged the Notes for
Exchange Notes which are generally freely tradable, subject to certain
exceptions.

Other Financing Activities

Effective September 18, 2003, we entered into interest rate swap agreements
in the aggregate notional amount of $50.0 million. We have designated the swaps
as hedges against changes in the fair value of a designated portion of the Notes
due to changes in underlying interest rates. Changes in the fair value of the
interest rate swaps will be recorded in earnings along with related designated
changes in the value of the Notes. The agreements, which have payment and
expiration dates and call provisions that coincide with the terms of the Notes,
effectively convert $50.0 million of the Notes into variable rate obligations.
Under the agreements, we receive a fixed interest rate payment from the
financial counterparties to the agreements equal to 8.25% per year calculated on
the notional $50.0 million amount, while we make a variable interest rate
payment to the same counterparties equal to the six-month London Interbank
Offered Rate plus a fixed margin of 3.45%, also calculated on the notional $50.0
million amount.

In connection with the financing and management of one Australian facility,
our wholly owned Australian subsidiary financed the facility's development and
subsequent expansion in 2003 with long-term debt obligations, which are
non-recourse to us. We have consolidated the subsidiary's direct finance lease
receivable from the state government and related non-recourse debt each totaling
approximately $43.9 million and $31.4 million as of December 28, 2003 and
December 29, 2002, respectively. As a condition of the loan, we are required to
maintain a restricted cash balance of approximately $3.7 million. The term of
the non-recourse debt is through 2017 and it bears interest at a variable rate
quoted by certain Australian banks plus 140 basis points. Any obligations or
liabilities of the subsidiary are matched by a similar or corresponding
commitment from the government of the State of Victoria.

Cash provided by operating activities in 2003, 2002 and 2001 was $21.3
million, $25.4 million, and $29.5 million, respectively. 2003 cash provided by
operating activities was positively impacted by an increase in accounts payable
and accrued expenses and other liabilities. The increase in accounts payable and
other accrued expenses is attributable to the increase in value of our
Australian subsidiary's accounts payable and accrued expenses due to an increase
in foreign exchange rates and an increase in reserves for self insurance. The
increase in other liabilities reflects an increase in the liability for the fair
market value of our Australian subsidiary's interest rate swap and an increase
in certain pension obligations.

Cash provided by operating activities in 2003 was negatively impacted by an
increase in accounts receivable. The increase in accounts receivable is
attributable to the increase in value of our Australian subsidiary's accounts
receivable due to an increase in foreign exchange rates, the addition of the
Lawrenceville Facility and slightly higher monthly billings reflecting a general
increase in facility occupancy levels.

43

The $4.1 million decrease in cash provided by operating activities from
2001 to 2002 primarily reflects increases in accounts receivable and other
current assets and decreases in accounts payable and accrued expenses. These
were partially offset by higher net income, depreciation expense and an increase
in other liabilities. The increase in other liabilities was primarily driven by
costs related to employment agreements with certain key executives triggered by
the change in control of TWC as well as an acceleration of the retirement age
under senior executive deferred compensation plans, also a result of the sale of
TWC.

Cash provided by investing activities was $18.3 million dollars in 2003.
Cash used in investing activities in 2002 and 2001 was $159.3 million, and $3.9
million, respectively. Cash provided by investing activities in 2003 reflects
the gross proceeds from the sale of PCG offset by restricted cash and capital
expenditures in the normal course of business. Our Senior Credit Facility allows
for the reinvestment of the net proceeds of the sale of PCG into certain
permitted investments, as defined in the Senior Credit Facility, by June 28,
2004 or requires that we use the proceeds to pay down the term loan. In the
event we are unable to extend the requirement to reinvest the proceeds in a
permitted investment by June 28, 2004, we will be required to pay approximately
$52 million dollars on the Term Loan. Additionally during 2003, our wholly owned
Australian subsidiary financed the expansion of a facility with non recourse
debt. As a condition of the loan we are required to maintain a restricted cash
balance of approximately $3.7 million. The $155.4 million increase in cash used
in investing activities from 2001 to 2002 is primarily due to the purchase by us
in December 2002 of four correctional properties in operation under our prior
operating lease facility. We acquired these four properties from the operating
lease facility for an aggregate purchase price of approximately $155.0 million.

Cash used in financing activities was $17.2 million in 2003 and $11.2
million in 2001. Cash provided by financing activities in 2002 was $126.1
million. Cash used in financing activities in 2003 reflects the sale of the
Notes, and purchase of 12 million shares of our common stock from Group 4 Falck
for $132.0 million. The $137.3 million increase in cash provided by financing
activities from 2001 to 2002 reflects borrowings under our former senior credit
facility.

Current cash requirements consist of amounts needed for working capital,
capital expenditures and supply purchases and investments in joint ventures.
Some of our management contracts require us to make substantial initial
expenditures of cash in connection with opening or renovating a facility. The
initial expenditures subsequently are fully or partially recoverable as
pass-through costs or are billable as a component of the per diem rates or
monthly fixed fees to the contracting agency over the original term of the
contract. However, we cannot assure you that any of these expenditures would, if
made, be recovered. Based on current estimates of our capital needs, we
anticipate that our capital expenditures will not exceed $12.0 million during
the next 12 months. We plan to fund these capital expenditures from cash from
operations.

Our management believes that cash on hand, cash flows from operations and
available lines of credit will be adequate to support currently planned business
expansion and various obligations incurred in the operation of our business,
both on a near and long-term basis.

Our access to capital and ability to compete for future capital-intensive
projects will be dependent upon, among other things, our ability to meet certain
financial covenants in our Senior Credit Facility. A substantial decline in our
financial performance as a result of an increase in operational expenses
relative to revenue could limit our access to capital and have a material
adverse affect on our liquidity and capital resources and, as a result, on our
financial condition and results of operations.

CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS

The following is a table of certain of our contractual obligations, as of
December 28, 2003, which requires us to make payments over the periods
presented.

44

At December 28, 2003 we also had outstanding eleven letters of guarantee
totaling approximately $6.7 million under separate international credit
facilities. We do not have any off balance sheet arrangements or guarantees
which would subject us to additional liabilities.

COMMITMENTS AND CONTINGENCIES

Our contract with the California Department of Corrections for the
management of the 224-bed McFarland Community Corrections Center expired on
December 31, 2003. During the year ended December 28, 2003, the contract for the
McFarland facility represented less than 1% of our consolidated revenues. Even
though we are no longer operating the McFarland facility, we will continue to be
responsible for payments on our underlying lease of the facility with CPV
through April 2008, when the lease is scheduled to expire. We are actively
pursuing various alternatives for the facility, including finding an alternative
correctional use for the facility or subleasing the facility to agencies of the
federal and/or state governments or another private operator. If we are unable
to find an appropriate correctional use for the facility or sublease the
facility, we may be required to record an operating charge related to a portion
of the future lease costs with CPV in accordance with SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." The remaining lease
obligation is approximately $3.3 million through April 28, 2008.

During 2000, our management contract at the 276-bed Jena Juvenile Justice
Center in Jena, Louisiana was discontinued by the mutual agreement of the
parties. Despite the discontinuation of the management contract, we remain
responsible for payments on our underlying lease of the inactive facility. We
incurred an operating charge of $1.1 million during the year ended December 29,
2002, related to our lease of the inactive facility that represented the
expected costs to be incurred under the lease until a sublease or alternative
use could be initiated in early 2004. During 2003 parties that we previously
believed might sublease the facility prior to early 2004 either indicated that
they did not have an immediate need for the facility or did not enter into a
binding commitment for a sublease of the facility. As a result our management
determined that it was unlikely that we would sublease the facility or find an
alternative correctional use for the facility prior to the expiration of the
provision for anticipated losses through early 2004 and we incurred an
additional operating charge of 5.0 million during 2003. This additional
operating charge both covers our anticipated losses under the lease for the
facility until a sublease is in place and provides us with an estimated discount
to sublease the facility to prospective sublessees. We are continuing our
efforts to find a sublease or alternative correctional use for the facility. If
we are unable to sublease or find an alternative correctional use for the
facility prior to January 2006, an additional operating charge will be required.
As of December 28, 2003, the remaining obligation on the Jena lease through the
contractual term of 2009, exclusive of the reserve for losses through early
2006, is approximately $7.0 million.

In Australia, the Department of Immigration, Multicultural and Indigenous
Affairs, which we refer to as DIMIA, recently entered into a contract with a
division of Group 4 Falck for the management and operation of Australia's
immigration centers, services which we have provided since 1997 through our
Australian subsidiary. We transitioned the management and operation of the DIMIA
centers to the division of Group 4 Falck effective February 29, 2004. For the
year ended December 28, 2003 DIMIA represented approximately 9.9% of our
consolidated revenues. We do not have any lease obligations related

45

to our contract with DIMIA. During 2003, we increased reserves approximately
$3.6 million for liability insurance obligations related to the expiration of
the DIMIA contract.

INFLATION

We believe that inflation, in general, did not have a material effect on
our results of operations during fiscal 2003, 2002 and 2001. While some of our
contracts include provisions for inflationary indexing, inflation could have a
substantial adverse effect on our results of operations in the future to the
extent that wages and salaries, which represent our largest expense, increase at
a faster rate than the per diem or fixed rates received by us for our management
services. See "Risk Factors -- Our profitability may be materially adversely
affected by inflation."

MARKET RISK

We are exposed to market risks related to changes in interest rates with
respect to our Senior Credit Facility. Monthly payments under the Senior Credit
Facility are indexed to a variable interest rate. Based on borrowings
outstanding under the Senior Credit Facility of $98.8 million as of December 28,
2003, for every one percent increase in the interest rate applicable to the
Senior Credit Facility, our total annual interest expense would increase by $1.1
million. Additionally, for every one percent increase in the interest rate
applicable to the $50.0 million swap agreements on the Notes described above,
our total annual interest expense will increase by $0.5 million.

We are also exposed to market risks, related to fluctuations in foreign
currency exchange rates between the U.S. dollar and the Australian dollar and
the South African rand currency exchange rates. Based upon the Company's foreign
currency exchange rate exposure at December 28, 2003, every 10 percent change in
historical currency rates would have approximately a $3.0 million effect on our
financial position and approximately a $1.0 million impact on our results of
operations over the next fiscal year.

We have entered into certain interest rate swap arrangements fixing the
interest rate on our Australian non-recourse debt to 9.7%. The difference
between the floating rate and the swap rate on these instruments is recognized
in interest expense within the respective entity. Because the interest rates
with respect to these instruments are fixed, a hypothetical 100 basis point
change in the current interest rate would not have a material impact on our
financial statements.

Additionally, we invest our cash in a variety of short-term financial
instruments. These instruments generally consist of highly liquid investments
with original maturities at the date of purchase of three months or less. While
these instruments are subject to interest rate risk, a hypothetical 100 basis
point increase or decrease in market interest rates would not have a material
impact on our financial statements.

FORWARD-LOOKING STATEMENTS -- SAFE HARBOR

This report and the documents incorporated by referenced herein contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. "Forward-looking" statements are any statements that are not based
on historical information. Statements other than statements of historical facts
included in this report, including, without limitation, statements regarding our
future financial position, business strategy, budgets, projected costs and plans
and objectives of management for future operations, are "forward-looking"
statements. Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" or "continue" or the negative of
such words or variations of such words and similar expressions. These statements
are not guarantees of future performance and involve certain risks,
uncertainties and assumptions, which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements and we can give no assurance that such
forward-looking statements will prove to be correct. Important factors that
could

46

cause actual results to differ materially from those expressed or implied by the
forward-looking statements, or "cautionary statements," include, but are not
limited to:

- our ability to timely build and/or open facilities as planned, profitably
manage such facilities and successfully integrate such facilities into
our operations without substantial additional costs;

- the instability of foreign exchange rates, exposing us to currency risks
in Australia, New Zealand and South Africa, or other countries in which
we may choose to conduct our business;

- an increase in labor rates beyond that which was budgeted;

- our ability to expand our correctional and mental health services;

- our ability to win management contracts for which we have submitted
proposals and to retain existing management contracts;

- our ability to raise new project development capital given the often
short-term nature of the customers' commitment to use newly developed
facilities;

- our ability to find customers for our Jena, Louisiana Facility and our
McFarland, California Facility and/or to sub-lease or coordinate the sale
of the facilities with their owner, Correctional Properties Trust, which
we refer to as CPV;

- our ability to accurately project the size and growth of the domestic and
international privatized corrections industry;

- our ability to estimate the government's level of utilization of
privatization;

- our ability to obtain future financing at competitive rates;

- our exposure to general liability and workers' compensation insurance
costs;

- our ability to maintain occupancy rates at our facilities;

- our ability to manage health related insurance costs and medical
malpractice liability claims;

- the ability of our government customers to secure budgetary
appropriations to fund their payment obligations to us;

- our ability to effectively internalize functions and services previously
provided by The Wackenhut Corporation, our former parent company; and

- those factors disclosed under "Risk Factors" and elsewhere in this
report, including, without limitation, in conjunction with the
forward-looking statements included in this report.

We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us,
or persons acting on our behalf, are expressly qualified in their entirety by
the cautionary statements included in this report.

47

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED DECEMBER 28, 2003, DECEMBER 29, 2002, AND DECEMBER 30, 2001

The accompanying notes to consolidated financial statements are an integral part
of these statements.

48

THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 2003 AND DECEMBER 29, 2002

The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.

49

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 28, 2003, DECEMBER 29, 2002, AND DECEMBER 30, 2001

The accompanying notes to consolidated financial statements are an integral part
of these statements.

50

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FISCAL YEARS ENDED DECEMBER 28, 2003, DECEMBER 29, 2002, AND DECEMBER 30, 2001

The accompanying notes to consolidated financial statements are an integral part
of these statements.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE FISCAL YEARS ENDED DECEMBER 28, 2003, DECEMBER 29, 2002, AND DECEMBER
30, 2001

1. GENERAL

The GEO Group, Inc., a Florida corporation, formerly known as Wackenhut
Corrections Corporation and subsidiaries (the "Company") is a leading developer
and manager of privatized correctional, detention and public sector mental
health services facilities located in the United States, Australia, South
Africa, and New Zealand. Until July 9, 2003, the Company was a majority owned
subsidiary of The Wackenhut Corporation, ("TWC"). TWC previously owned 12
million shares of the Company's common stock.

On May 8, 2002, TWC consummated a merger with a wholly owned subsidiary of
Group 4 Falck A/S ("Group 4 Falck") a Danish multinational security and
correctional services company. As a result of the merger, Group 4 Falck acquired
TWC and became the indirect beneficial owner of 12 million shares of the
Company.

On July 2, 2003, the Company sold its 50% interest in its United Kingdom
joint venture, Premier Custodial Group Limited for approximately $80.7 million
and recognized a pre-tax gain of approximately $61.0 million.

On July 9, 2003, the Company purchased all 12 million shares of the its
common stock, par value $0.01, beneficially owned by Group 4 Falck for $132
million in cash pursuant to the terms of a share purchase agreement.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR

The Company's fiscal year ends on the Sunday closest to the calendar year
end. Fiscal years 2003, 2002 and 2001 each included 52 weeks.

BASIS OF FINANCIAL STATEMENT PRESENTATION

The consolidated financial statements include the accounts of the Company
and its subsidiaries. Investments in 50 percent owned affiliates are accounted
for under the equity method. All significant intercompany transactions and
balances between the Company and its subsidiaries have been eliminated in
consolidation. Certain reclassifications of the prior year's financial
statements have been made to conform to the current year's presentation.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company's significant estimates
include allowance for doubtful accounts, construction cost estimates, employee
deferred compensation accruals, reserves for insurance and legal, the reserve
related to the Jena Facility and certain reserves required under its operating
contracts. While the Company believes that such estimates are fair when
considered in conjunction with the consolidated financial statements taken as a
whole, the actual amounts of such estimates, when known, will vary from these
estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate their fair value due to the
short maturity of these items. The carrying value of the Company's long-term
debt related to its Senior Credit Facility (See Note 4) and non-recourse debt
approximates fair value based on the variable interest rates on the debt. For
the Company's 8 1/4% Senior

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Unsecured Notes, the carrying value and fair value based on quoted market rates
was $150.0 million and $160.1, respectively, at December 28, 2003.

CASH AND CASH EQUIVALENTS

The Company classifies as cash equivalents all interest-bearing deposits or
investments with original maturities of three months or less.

ACCOUNTS RECEIVABLE

The Company extends credit to the governmental agencies contracted with and
other parties in the normal course of business as a result of billing and
receiving payment for services thirty to sixty days in arrears. Further, the
Company regularly reviews outstanding receivables, and provide estimated losses
through an allowance for doubtful accounts. In evaluating the level of
established reserves the Company makes judgments regarding its customers'
ability to make required payments, economic events and other factors. As the
financial condition of these parties change, circumstances develop or additional
information becomes available, adjustments to the allowance for doubtful
accounts may be required.

INVENTORIES

Food and supplies inventories are carried at the lower of cost or market,
on a first-in first-out basis and are included in "other current assets" in the
accompanying consolidated balance sheets. Uniform inventories are carried at
amortized cost and are amortized over a period of eighteen months. The current
portion of unamortized uniforms is included in "other current assets." The
long-term portion is included in "other assets" in the accompanying consolidated
balance sheets.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation.
Maintenance and repairs are expensed as incurred. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets.
Accelerated methods of depreciation are generally used for income tax purposes.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease. Interest is
capitalized in connection with the construction of correctional and detention
facilities. Capitalized interest is recorded as part of the asset to which it
relates and is amortized over the asset's estimated useful life. No interest
cost was capitalized in 2003 or 2002.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews for impairment of long-lived assets to be held and used
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be fully recoverable. Determination of recoverability is
based on an estimate of undiscounted future cash flows resulting from the use of
the asset and its eventual disposition. Measurement of an impairment loss for
long-lived assets that management expects to hold and use is based on the fair
value of the asset. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value less costs to sell. Management has
reviewed the Company's long-lived assets and determined that there are no events
requiring impairment loss recognition. Events that would trigger an impairment
assessment include deterioration of profits for a business segment that has
long-lived assets, or when other changes occur which might impair recovery of
long-lived assets.

GOODWILL

Effective December 31, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
As a result of adopting SFAS No. 142, the Company's goodwill is no longer
amortized, but is subject to an annual impairment test. In accordance

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with SFAS No. 142, the Company ceased amortizing goodwill as of the beginning of
2002. The Company's goodwill at December 28, 2003 was associated with its
Australian subsidiary in the amount of $0.4 million. Additionally, the Company's
50%-owned joint venture in the UK that was sold in July 2003 (See note 10) had
goodwill of approximately $1.1 million at December 29, 2002. SFAS No. 142
requires that transitional impairment tests be performed at its adoption, and
provides that resulting impairment losses for goodwill be reported as the effect
of a change in accounting principle. There was no impairment of goodwill as a
result of adopting SFAS No. 142 or the annual impairment test completed during
the fourth quarter of 2002 and 2003.

The following table provides a reconciliation of reported net income for
the year ended December 30, 2001 to net income adjusted as if SFAS No. 142 had
been applied as of the beginning of 2001:

Goodwill represents the cost of acquired enterprises in excess of the fair
value of the net tangible and identifiable intangible assets acquired. Prior to
the adoption of SFAS No. 142 the Company amortized goodwill on a straight-line
basis over periods of 5 to 10 years. Accumulated amortization totaled
approximately $2.6 million at December 30, 2001.

DEFERRED REVENUE

Deferred revenue primarily represents the unamortized net gain on the
development of properties and on the sale and leaseback of properties by the
Company to Correctional Properties Trust ("CPV"), a Maryland real estate
investment trust. The Company leases these properties back from CPV under
operating leases. Deferred revenue is being amortized over the lives of the
leases and is recognized in income as a reduction of rental expenses.

REVENUE RECOGNITION

In accordance with SEC Staff Accounting Bulletin No. 101, as amended by
Staff Accounting Bulletin No. 104 and related interpretations, facility
management revenues are recognized as services are provided under facility
management contracts with approved government appropriations based on a net rate
per day per inmate or on a fixed monthly rate. The Company performs ongoing
credit evaluations of its customers'

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial condition and generally does not require collateral. The Company
maintains reserves for potential credit losses, and such losses traditionally
have been within its expectations.

Project development and design revenues are recognized as earned on a
percentage of completion basis measured by the percentage of costs incurred to
date as compared to estimated total cost for each contract. This method is used
because the Company considers costs incurred to date to be the best available
measure of progress on these contracts. Provisions for estimated losses on
uncompleted contracts and changes to cost estimates are made in the period in
which management determine that such losses and changes are probable. Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to estimated
costs and income, and are recognized in the period in which the revisions are
determined.

OPERATING EXPENSES

Operating expenses consist primarily of compensation and other personnel
related costs, facility lease and operational costs, inmate related expenses,
and medical expenses and are recognized as incurred.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
determined based on the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities given the provisions
of enacted tax laws. Deferred income tax provisions and benefits are based on
changes to the assets or liabilities from year to year. Valuation allowances are
recorded related to deferred tax assets based on the "not more likely than not"
criteria of FSAS No. 109.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding. In the computation of
diluted earnings per share, the weighted-average number of common shares
outstanding is adjusted for the dilutive effect of shares issuable upon exercise
of stock options calculated using the treasury stock method.

DIRECT FINANCE LEASES

The Company accounts for the portion of its contracts with certain
governmental agencies that represent capitalized lease payments on buildings and
equipment as investments in direct finance leases. Accordingly, the minimum
lease payments to be received over the term of the leases less unearned income
are capitalized as the Company's investments in the leases. Unearned income is
recognized as income over the term of the leases using the interest method.

RESERVES FOR INSURANCE LOSSES

Casualty insurance related to workers' compensation, general liability and
automobile insurance coverage is provided through an independent insurer. Prior
to October 2, 2002, the first $1 million of coverage was reinsured by an
insurance subsidiary of TWC. Effective October 2, 2002, the Company established
a new insurance program with a $1 million deductible per occurrence with an
independent insurer. The insurance program consists of primary and excess
insurance coverage. The primary general liability coverage has a $5 million
limit per occurrence with a $20 million general aggregate limit and a $1 million
deductible. The primary automobile coverage has a $3 million limit per
occurrence with a $20 million general aggregate limit and with a $1 million
deductible and excess/umbrella coverage of up to $50.0 million per claim and for
all claims in the aggregate. For claims relating to medical malpractice

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

at the Company's correctional facilities the Company has a deductible of $1.0
million per claim and for all claims in the aggregate. For claims relating to
medical malpractice at the Company's mental health facilities, the Company has a
deductible of $2.0 million per claim and primary coverage of up to $5.0 million
per claim and for all claims in the aggregate. For claims relating to worker's
compensation limits the Company maintains statutory coverage as determined by
state and/or local law and, as a result the Company's coverage varies among the
various jurisdictions in which it operates. The Company is self-insured for
employment claims. The current professional liability policy for our mental
health facilities does not include tail coverage for prior periods.

Because the insurance policies have high deductible amounts, losses are
recorded as reported and provision is made to cover losses incurred but not
reported. Loss reserves are undiscounted and are computed based on independent
actuarial studies. The Company expensed costs related to its insurance program
of $14.9 million, $22.8 million and $22.0 million for the fiscal years ended
December 28, 2003, December 29, 2002 and December 30, 2001, respectively.
Reserves for insurance losses totaled $13.6 and $4.1 as of December 28, 2003 and
December 29, 2002, respectively and are included in accrued expenses in the
consolidated financial statements.

The Company is self-insured for employment claims and medical malpractice
and recognized approximately $1.3 million, $1.4 million and $0.3 million of
self-insurance expense related to the employment claims and medical malpractice
claims for each of the fiscal years ended December 28, 2003, December 29, 2002
and December 30, 2001, respectively.

Claims for which our joint venture in South Africa is insured arising from
its operations, are covered by policies with varying amounts of coverage
depending on the nature of the claim. Primary insurance in the amount of ZAR50
million (approximately $7.5 million at December 28, 2003) is provided for
general liability claims. This insurance contains a ZAR5 million (approximately
$0.8 million at December 28, 2003) deductible. Excess insurance is provided
above the ZAR50 million primary policy with limits up to ZAR250 million
(approximately $37.3 million at December 28, 2003). Medical malpractice claims
are insured up to ZAR14.7 million (approximately $2.2 million at December 28,
2003) with a ZAR50,000 deductible (approximately $7,500 at December 28, 2003).

Claims for which we are insured arising from operations in Australia and
New Zealand are covered by policies with varying amounts of coverage depending
on the nature of the claim. For public liability claims, we maintain primary
insurance of AUD$5 million (approximately $3.7 million at December 28, 2003)
with an AUD$250,000 deductible (approximately $0.2 million at December 28,
2003). Medical malpractice claims are insured up to AUD$10 million
(approximately $7.4 million at December 28, 2003) with an AUD$1 million
deductible (approximately $0.7 million at December 28, 2003).

DEBT ISSUANCE COSTS

Debt issuance costs totaling $6.9 million and $2.8 million at December 28,
2003, and December 29, 2002, respectively, are included in other non current
assets in the consolidated balance sheets and are amortized into interest
expense on a straight-line basis, which is not materially different than the
interest method, over the term of the related debt.

COMPREHENSIVE INCOME

SFAS No. 130, "Reporting Comprehensive Income" requires companies to report
all changes in equity in a financial statement for the period in which they are
recognized, except those resulting from investment by owners and distributions
to owners. The Company has disclosed Comprehensive Income, which encompasses net
income, foreign currency translation adjustments, unrealized loss on derivative
instruments and the minimum pension liability adjustment in the Consolidated
Statements of Shareholders' Equity and Comprehensive Income.

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
trade accounts receivable, direct finance lease receivable, long-term debt and
financial instruments used in hedging activities. The Company's cash management
and investment policies restrict investments to low-risk, highly liquid
securities, and the Company performs periodic evaluations of the credit standing
of the financial institutions with which it deals. As of December 28, 2003, and
December 29, 2002, the Company had no significant concentrations of credit risk
except as disclosed in Notes 6 and 10.

FOREIGN CURRENCY TRANSLATION

The Company's foreign operations use their local currencies as their
functional currencies. Assets and liabilities of the operations are translated
at the exchange rates in effect on the balance sheet date and shareholders'
equity is translated at historical rates. Income statement items are translated
at the average exchange rates for the year. The impact of currency fluctuation
is included in shareholders' equity as a component of accumulated other
comprehensive loss and totaled approximately $2.0 million at December 28, 2003
and approximately $(6.0) million as of December 29, 2002.

INTEREST RATE SWAPS

In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and its related
interpretations and amendments, the Company records derivatives as either assets
or liabilities on the balance sheet and measures those instruments at fair
value. For derivatives that are designed as and qualify as effective cash flow
hedges, the portion of gain or loss on the derivative instrument effective at
offsetting changes in the hedged item is reported as a component of accumulated
other comprehensive income and reclassified into earnings when the hedged
transaction affects earnings. Total accumulated other comprehensive loss related
to these cash flow hedges was $3.7 million and $15.9 million as of December 28,
2003 and December 29, 2002, respectively. For derivative instruments that are
designated as and qualify as effective fair value hedges, the gain or loss on
the derivative instrument as well as the offsetting gain or loss on the hedged
item attributable to the hedged risk is recognized in current earnings as
interest income (expense) during the period of the change in fair values.

The Company formally documents all relationships between hedging
instruments and hedge items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
attributing all derivatives that are designated as cash flow hedges to floating
rate liabilities and attributing all derivatives that are designated as fair
value hedges to fixed rate liabilities. The Company also assesses whether each
derivative is highly effective in offsetting changes in the cash flows of the
hedged item. Fluctuations in the value of the derivative instruments are
generally offset by changes in the hedged item; however, if it is determined
that a derivative is not highly effective as a hedge or if a derivative ceases
to be a highly effective hedge, the Company will discontinue hedge accounting
prospectively for the affected derivative.

ACCOUNTING FOR STOCK-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value method of accounting for issuance of stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to SFAS No. 123,
companies are not required to adopt the fair value method of accounting for
employee stock-based transactions. Companies are permitted to account for such
transactions under Accounting Principles Board Opinion No. 25 ("APB Opinion No.
25), "Accounting for Stock Issued to Employees," but are required to disclose in
a note to

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the financial statements pro forma net income and per share amounts as if the
Company had applied the methods prescribed by SFAS No. 123.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an Amendment of SFAS No. 123". SFAS
No. 148 amends SFAS No. 123, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Currently, the Company accounts for stock option plans under APB Opinion No. 25,
under which no compensation has been recognized. SFAS No. 148 is effective for
fiscal years beginning after December 15, 2002. Management of the Company does
not intend to change its policy with regard to stock based compensation and
there was no impact on its financial position, results of operations or cash
flows upon adoption. Except for non-employee directors, the Company has not
granted any options to non-employees. See Note 14 for more information regarding
the Company's stock option plans.

A summary of the status of the Company's four stock option plans is
presented below.

The following table summarizes information about the stock options
outstanding at December 28, 2003:

The Company had 182,674 options available to be granted at December 28,
2003 under the aforementioned stock plans.

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

If the Company were to account for its stock option plans in accordance
with SFAS No. 123 and compensation cost had been determined based on the fair
value at date of grant, the Company's net income and earnings per share would
have been reduced to the pro forma amounts as follows:

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires companies to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the Company
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, the Company either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. The
standard is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The adoption of SFAS No. 143 did not have a
material impact on the Company's financial position, results of operations or
cash flows in the year of adoption.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, requires gains and losses on
extinguishment of debt to be classified as part of continuing operations rather
than treated as extraordinary, as previously required in accordance with SFAS
No. 4. SFAS No. 145 also modifies accounting for subleases where the original
lessee remains the secondary obligor and requires certain modifications to
capital leases to be treated as a sale-leaseback transaction. The adoption of
SFAS No. 145 did not have material impact on the Company's financial position,
results of operations or cash flows.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies the
guidance previously provided under Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Among other things, SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
as opposed to when there is commitment to a restructuring plan as set forth
under the nullified guidance. The adoption of SFAS No. 146 in 2003 did not have
a material impact on the Company's financial position, results of operations or
cash flows.

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This statement is effective for contracts entered into or modified
after June 30, 2003, for hedging relationships designated after June 30, 2003,
and to certain preexisting contracts. The Company adopted SFAS No. 149 and there
was no material impact on its financial position, results of operations or cash
flows from adoption.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its financial
position certain financial instruments with characteristics of both liabilities
and equity. In accordance with this standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. SFAS
No. 150 is effective for all financial instruments entered into on or modified
after May 31, 2003. For existing financial instruments, SFAS No. 150 is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company adopted SFAS No. 150 and there was no material impact on its
financial position, results of operations or cash flows from adoption.

In November 2002, the FASB's Emerging Issues Task Force ("EITF") reached a
final consensus on Issue No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables, which is effective for revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. Under EITF Issue No. 00-21,
revenue arrangements with multiple deliverables are required to be divided into
separate units of accounting under certain circumstances. The Company adopted
EITF Issue No. 00-21 during 2003, and such adoption did not have a material
effect on its consolidated financial statements.

In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition (SAB No. 104), which codifies, revises and rescinds certain
sections of SAB No. 101, Revenue Recognition, in order to make this interpretive
guidance consistent with current authoritative guidance. The changes noted in
SAB No. 104 did not have a material impact upon the Company's financial
position, cash flows or results of operations.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," which addressed consolidation by a business of variable
interest entities in which it is the primary beneficiary. In December 2003 the
FASB issued FIN No. 46 (revised) which replaced FIN No. 46. FIN No. 46 (revised)
is effective immediately for certain disclosure requirements and variable
interest entities referred to as special-purpose entities for periods ending
after December 15, 2003 and for all other types of entities for financial
statements for periods ending after March 15, 2004. The application of FIN 46
(revised) in 2003 did not have a material effect on its financial position,
results of operations and cash flows. Additionally the Company does not expect
the application of remaining requirements in first quarter 2004 to have material
impact on the Company's financial position, results of operations and cash
flows.

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at fiscal year end:

Capitalized interest is recorded as part of the asset to which it relates
and is amortized over the asset's estimated useful life. No interest was
capitalized in 2003 and 2002.

In December 2002, the Company acquired four correctional properties that
were formerly included in the Company's operating lease facility for an
aggregate purchase price of approximately $155 million.

4. LONG-TERM DEBT

Prior to December 12, 2002, the Company was party to a $30 million
multi-currency revolving credit facility and a $154.3 million operating lease
facility established to acquire and develop new correctional institutions used
in its business. At December 12, 2002, no amounts were outstanding under the
revolving credit facility and $154.3 million was outstanding under the operating
lease facility. The term of the operating lease facility was set to expire
December 18, 2002 upon which the Company had the ability to purchase the
properties in the facility for their original acquisition cost.

On December 12, 2002, the Company entered into a new $175 million senior
secured credit facility, consisting of a $50 million, 5-year revolving loan and
a $125 million, 6-year term loan. Borrowings under the term loan facility and
corporate cash were used to purchase four correctional facilities in operation
under the Company's $154.3 million operating lease facility. The purchase price
totaled approximately $155 million, which included related fees and expenses.
Simultaneous with the closing of the senior secured credit facility, the Company
terminated its $154.3 million operating lease facility and $30 million
multi-currency revolving credit facility.

To facilitate the completion of the purchase of the 12 million shares from
Group 4 Falck, the Company amended its senior secured credit facility (the
"Senior Credit Facility") and issued $150 million, aggregate principal amount,
ten-year, 8 1/4% Senior Unsecured Notes (the "Notes") in a private offering to
qualified institutional buyers under Rule 144A of the Securities Act of 1933.

THE SENIOR CREDIT FACILITY

The Senior Credit Facility consists of a $50 million, 5-year revolving loan
(the "Revolving Credit Facility"), and a $100 million, 6-year term loan (the
"Term Loan Facility"). The Revolving Credit Facility contains a $40 million
limit for the issuance of standby letters of credit. On February 20, 2004, the
Company amended the Senior Credit Facility to, among other things, reduce the
interest rates applicable to borrowings under the Senior Credit Facility, give
it the flexibility to make certain information technology related capital
expenditures and provide it with additional time to reinvest the proceeds from
the sale of PCG. At December 28, 2003, the Company had borrowings of $98.8
million outstanding under the Term Loan Facility, no amounts outstanding under
the Revolving Credit Facility, and $24.5 million

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

outstanding in letters of credit under the Revolving Credit Facility. As of
March 5, 2004, the Company had borrowings of $97.5 million outstanding under the
Term Loan Facility and $7.5 million outstanding under the Revolving Credit
Facility.

All of the obligations under the Senior Credit Facility are unconditionally
guaranteed by each of the Company's existing material domestic subsidiaries. The
Senior Credit Facility and the related guarantees are secured by substantially
all of the Company's present and future tangible and intangible assets and all
present and future tangible and intangible assets of each guarantor, including
but not limited to (i) a first-priority pledge of all of the outstanding capital
stock owned by the Company and each guarantor, and (ii) perfected first-priority
security interests in all of the Company's present and future tangible and
intangible assets and the present and future tangible and intangible assets of
each guarantor.

Indebtedness under the Revolving Credit Facility portion of the Senior
Credit Facility bears interest at the Company's option at the base rate plus a
spread varying from 0.75% to 1.50% (depending upon a leverage-based pricing grid
set forth in the Senior Credit Facility), or at the London inter-bank offered
rate ("LIBOR") plus a spread, varying from 2.00% to 2.75% (depending upon a
leverage-based pricing grid set forth in the Senior Credit Facility). Borrowings
under the Revolving Credit Facility are currently bearing interest at LIBOR plus
a spread of 2.5%. The Term Loan Facility bears interest at the Company's option
at the base rate plus a spread of 1.25%, or at LIBOR plus a spread of 2.5%.
Borrowings under the Term Loan Facility are currently bearing interest at LIBOR
plus a spread of 2.5%. If an event of default occurs under the Senior Credit
Facility (i) all LIBOR rate loans bear interest at the rate which is 2.0% in
excess of the rate then applicable to LIBOR rate loans until the end of the
applicable interest period and thereafter at a rate which is 2.0% in excess of
the rate then applicable to base rate loans, and (ii) all base rate loans bear
interest at a rate which is 2.0% in excess of the rate then applicable to base
rate loans.

The Senior Credit Facility contains financial covenants which require the
Company to maintain the following ratios, as computed at the end of each fiscal
quarter for the immediately preceding four quarter-period: a total leverage
ratio equal to or less than 3.50 to 1.00 through March 27, 2004, which reduces
thereafter in 0.25 increments to 2.50 to 1.00 on July 2, 2006 and thereafter; a
senior secured leverage ratio equal to or less than 1.75 to 1.00 through
September 25, 2004, which reduces thereafter to 1.50 to 1.00; and a fixed charge
coverage ratio equal to or greater than 1.10 to 1.00. In addition, the Senior
Credit Facility prohibits the Company from making capital expenditures greater
than $10.0 million in the aggregate during any fiscal year, provided that to the
extent that the Company's capital expenditures during any fiscal year are less
than the $10.0 million limit, such amount will be added to the maximum amount of
capital expenditures that the Company can make in the following year and further
provided that certain information technology related upgrades made prior to the
end of 2005 will not count against the annual limit on capital expenditures.

The Senior Credit Facility also requires the Company to maintain a minimum
net worth, as computed at the end of each fiscal quarter for the immediately
preceding four quarter-period, equal to $140.0 million, plus the amount of the
net gain from the sale of the Company's interest in PCG, which is approximately
$32.7 million, minus the $132.0 million the Company used to complete the share
purchase from Group 4 Falck, plus 50% of the Company's consolidated net income
earned during each full fiscal quarter ending after the date of the Senior
Credit Facility, plus 50% of the aggregate increases in the Company's
consolidated shareholders' equity that are attributable to the issuance and sale
of equity interests by the Company or any of its restricted subsidiaries
(excluding intercompany issuances).

The Senior Credit Facility contains certain customary representations and
warranties, and certain customary covenants that restrict the Company's ability
to, among other things (i) create, incur or assume any indebtedness, (ii) incur
liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions
and asset sales, (v) sell its assets, (vi) make certain restricted payments,
including declaring any cash dividends or redeem or repurchase capital stock,
except as otherwise permitted, (vii) issue, sell or otherwise dispose of its
capital stock, (viii) transact with affiliates, (ix) make changes to its
accounting

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

treatment, (x) amend or modify the terms of any subordinated indebtedness
(including the Notes), (xi) enter into debt agreements that contain negative
pledges on its assets or covenants more restrictive than contained in the Senior
Credit Facility, (xii) alter the business it conducts, and (xiii) materially
impair its lenders' security interests in the collateral for its loans.

Events of default under the Senior Credit Facility agreement include, but
are not limited to, (i) the Company's failure to pay principal or interest when
due, (ii) the Company's material breach of any representations or warranty,
(iii) covenant defaults, (iv) bankruptcy, (v) cross default to certain other
indebtedness, (vi) unsatisfied final judgments over a threshold to be
determined, (vii) material environmental claims which are asserted against the
Company, and (viii) a change of control.

SENIOR 8 1/4% NOTES

The Notes are general, unsecured, senior obligations. Interest is payable
semi-annually on January 15 and July 15 at 8.25%, beginning on January 15, 2004.
The Notes are governed by the terms of an Indenture, dated July 9, 2003, between
the Company and the Bank of New York, as trustee(the "Indenture"). Under the
terms of the Indenture, at any time on or prior to July 15, 2006, the Company
may redeem up to 35% of the Notes with the proceeds from equity offerings at
108.25% of the principal amount to be redeemed plus the payment of accrued and
unpaid interest, and any applicable liquidated damages. Additionally, after July
15, 2008, the Company may redeem, at the Company's option, all or a portion of
the Notes plus accrued and unpaid interest at various redemption prices ranging
from 104.125% to 100.000% of the principal amount to be redeemed, depending on
when the redemption occurs. The Indenture contains covenants that limit the
Company's ability to incur additional indebtedness, pay dividends or
distributions on its common stock, repurchase its common stock, or prepay
subordinated indebtedness. The Indenture also limits the Company's ability to
issue preferred stock, make certain types of investments, merge or consolidate
with another company, guarantee other indebtedness, create liens and transfer
and sell assets. The covenants in the Indenture can substantially restrict the
Company's business operations. Under the terms of the indenture governing the
Notes, the Company has an obligation to use the proceeds from the sale of its
interest in the UK joint venture in the amount of approximately $52.0 million by
June 28, 2004 to reinvest in certain permitted businesses or assets, to repay
indebtedness outstanding under the amended senior credit facility or to make an
offer to repurchase the Notes. This amount is reflected as restricted cash.

Subsequent to the private offering of the Notes, the Company filed an S-4
registration statement to register under the Securities Act of 1933 exchange
notes (the "Exchange Notes"), having substantially identical terms as the Notes.
The registration statement was declared effective by the SEC on November 10,
2003. The Company then completed an exchange offer pursuant to the registration
statement, in which holders of the Notes exchanged the Notes for Exchange Notes
which are generally freely tradable, subject to certain exceptions.

As of December 28, 2003, the Notes are reflected net of the original
issuer's discount of approximately $4.4 million which is being amortized over
the ten year term of the Notes using the effective interest method.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Debt repayment schedules under the Term Loan and the Notes are as follows:

At December 28, 2003 the Company also had outstanding eleven letters of
guarantee totaling approximately $6.7 million under separate international
facilities.

The Company's wholly-owned Australian subsidiary financed the development
of a facility and subsequent expansion in 2003, with long-term debt obligations,
which are non-recourse to the Company and total $43.9 million and $31.4 million
at December 28, 2003 and December 29, 2002, respectively. The term of the
non-recourse debt is through 2017 and it bears interest at a variable rate
quoted by certain Australian banks plus 140 basis points. Any obligations or
liabilities of the subsidiary are matched by a similar or corresponding
commitment from the government of the State of Victoria. As a condition of the
loan, the Company is required to maintain a restricted cash balance of
approximately $3.7 million. This amount is included in restricted cash and the
annual maturities of the future debt obligation is included in non recourse
debt. See Note 5. The debt amortization schedule requires annual repayments of
$1.5 million in 2004, $1.6 million in 2005, $1.8 million in 2006, $2.0 million
in 2007, $2.3 million in 2008 and $34.6 million thereafter.

5. DERIVATIVE FINANCIAL INSTRUMENTS

Effective September 18, 2003, the Company entered into interest rate swap
agreements in the aggregate notional amount of $50 million. The Company has
designated the swaps as hedges against changes in the fair value of a designated
portion of the Notes due to changes in underlying interest rates. Changes in the
fair value of the interest rate swaps will be recorded in earnings along with
related designated changes in the value of the Notes. The agreements, which have
payment and expiration dates and call provisions that coincide with the terms of
the Notes, effectively convert $50 million of the Notes into variable rate
obligations. Under the agreements, the Company receives a fixed interest rate
payment from the financial counterparties to the agreements equal to 8.25% per
year calculated on the notional $50 million amount, while the Company makes a
variable interest rate payment to the same counterparties equal to the six-month
London Interbank Offered Rate plus a fixed margin of 3.45%, also calculated on
the notional $50 million amount. As of December 28, 2003, the fair value of the
swaps totaled approximately $0.7 million and is included in other non-current
assets and as an adjustment to the carrying value of the Notes in the
accompanying balance sheets. There was no material ineffectiveness of the
Company's interest rate swaps for the fiscal year ended December 28, 2003.

In connection with the non-recourse debt, the Company's Australian
subsidiary is a party to an interest rate swap agreement to fix the interest
rate on the variable rate non-recourse debt to 9.7%. The Company has determined
the swap to be an effective cash flow hedge. Accordingly, the Company records

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the value of the interest rate swap in accumulated other comprehensive income,
net of applicable income taxes. The total value of the swap liability as of
December 28, 2003 and December 29, 2002 was approximately $5.2 million and $6.0
million, respectively, and is recorded as a component of other liabilities in
the accompanying consolidated financial statements. There was no material
ineffectiveness of the Company's interest rate swaps for the fiscal years
presented. The Company's former 50% owned joint venture operating in the United
Kingdom was a party to several interest rate swaps to fix the interest rate on
its variable rate credit facility. The Company previously determined the swaps
to be effective cash flow hedges and upon the initial adoption of SFAS No. 133
on January 1, 2001, the Company recognized a $12.1 million reduction of
shareholders' equity. In connection with the sale of the 50% owned joint venture
in the UK, the Company reclassified the remaining balance of approximately $13.3
million from accumulated other comprehensive loss into earnings as a reduction
of the gain on sale of the UK joint venture.

6. INVESTMENT IN DIRECT FINANCE LEASES

The Company's investment in direct finance leases relates to the financing
and management of one Australian facility. The Company's wholly-owned Australian
subsidiary financed the facility's development with long-term debt obligations,
which are non-recourse to the Company. The Company's financial statements
reflect the consolidated the subsidiary's direct finance lease receivable from
the state government and related non-recourse debt each totaling approximately
$43.9 million and $31.4 as of December 28, 2003 and December 29, 2002,
respectively.

The future minimum rentals to be received are as follows (in thousands):

7. TRANSACTIONS WITH CORRECTIONAL PROPERTIES TRUST ("CPV")

On April 28, 1998, CPV acquired eight correctional and detention facilities
operated by the Company. Previously three members of the Company's board of
directors also served on CPV's board of directors. Effective September 9, 2002,
the companies no longer had common members serving on their respective boards of
directors. CPV also was granted the fifteen-year right to acquire and lease back
future correctional and detention facilities developed or acquired by the
Company. During fiscal 1998, 1999 and 2000, CPV acquired three additional
facilities for $109.4 million. The Company recognized no net proceeds from the
sale. There have been no purchase and sale transactions between the Company and
CPV since 2000.

Simultaneous with the purchases, the Company entered into ten-year
operating leases of these facilities from CPV. As the lease agreements are
subject to contractual lease increases, the Company

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

records operating lease expense for these leases on a straight-line basis over
the term of the leases. The deferred unamortized net gain related to sales of
the facilities to CPV at December 28, 2003, which is included in "Deferred
Revenue" in the accompanying consolidated balance sheets is $8.0, million with
$1.8 million short-term and $6.2 million long-term. The gain is being amortized
over the ten-year lease terms. The Company recorded net rental expense related
to the CPV leases of $20.0 million, $19.6 million and $19.1 million in 2003,
2002 and 2001, respectively, excluding the Jena rental expense (See Note 8).

The future minimum lease commitments under the leases for these eleven
facilities are as follows:

8. COMMITMENTS AND CONTINGENCIES

FACILITIES

The Company's contract with the California Department of Corrections for
the management of the 224-bed McFarland Community Corrections Center expired in
the first quarter of 2004 on December 31, 2003. During the year ended December
28, 2003, the contract for the McFarland facility represented less than 1% of
the Company's consolidated revenues. Even though the Company no longer operates
the McFarland facility, it will continue to be responsible for payments on the
underlying lease of the facility with CPV through 2008, when the lease is
scheduled to expire. The Company is actively pursuing various alternatives for
the facility, including finding an alternative correctional use for the facility
or subleasing the facility to agencies of the federal and/or state governments
or another private operator. If the Company is unable to find an appropriate
correctional use for the facility or sublease the facility, the Company may be
required to record an operating charge related to a portion of the future lease
costs with CPV in accordance with SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The remaining lease obligation is
approximately $3.3 million through April 28, 2008.

During 2000, the Company's management contract at the 276-bed Jena Juvenile
Justice Center in Jena, Louisiana was discontinued by the mutual agreement of
the parties. Despite the discontinuation of the management contract, the Company
remains responsible for payments on the Company's underlying lease of the
inactive facility. The Company incurred an operating charge of $1.1 million
during the year ended December 29, 2002, related to its lease of the inactive
facility that represented the expected costs to be incurred under the lease
until a sublease or alternative use could be initiated in early 2004. During
2003 parties that the Company previously believed might sublease the facility
prior to early 2004 either indicated that they did not have an immediate need
for the facility or did not enter into a binding commitment for a sublease of
the facility. As a result the Company's management determined that it was
unlikely that it would sublease the facility or find an alternative correctional
use for the facility prior to the expiration of the current provision for
anticipated loss through early 2004 and the Company incurred an additional
operating charge of 5.0 million during 2003. This additional operating charge
both covers the Company's anticipated losses under the lease for the facility
until a sublease is in place and provides an estimated discount to sublease the
facility to prospective sublessees. The Company is continuing its efforts to
find an alternative correctional use or sublease for the facility. If the
Company is unable to sublease or

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

find an alternative correctional use for the facility prior to January 2006, an
additional operating charge will be required. The remaining obligation on the
Jena lease through the contractual term of 2009, exclusive of the reserve for
losses through early 2006, is approximately $7 million.

In Australia, the Department of Immigration, Multicultural and Indigenous
Affairs ("DIMIA") recently entered into a contract with a division of Group 4
Falck for the management and operation of Australia's immigration centers,
services which the Company has provided since 1997 through its Australian
subsidiary. The Company transitioned the management and operation of the DIMIA
centers to the division of Group 4 Falck effective February 29, 2004. For the
year ended December 28, 2003 DIMIA represented approximately 9.9% of the
Company's consolidated revenues. The Company does not have any lease obligations
related to its contract with DIMIA. During 2003, the Company increased reserves
approximately $3.6 million for liability insurance obligations related to the
expiration of the DIMIA contract.

LEASES

The Company leases correctional facilities, office space, computers and
vehicles under non-cancelable operating leases expiring between 2004 and 2012.
The future minimum commitments under these leases exclusive of lease commitments
related to CPV, are as follows:

Rent expense was approximately $12.5 million, $15.7 million, and $15.8
million for fiscal 2003, 2002, and 2001 respectively. Rent expense for fiscal
2002 and 2001 included lease expense under the Company's operating lease
facility that expired in December 2002 (See Note 3).

LITIGATION, CLAIMS AND ASSESSMENTS

The Company is defending a wage and hour lawsuit filed in California state
court by ten current and former employees. The employees are seeking
certification of a class which would encompass all the Company's current and
former California employees in certain selected posts. Discovery is underway and
the court has yet to hear the plaintiffs' certification motion. While the
plaintiffs in this case have not quantified their claim of damages and the
outcome of the matters discussed above cannot be predicted with certainty, based
on information known to date, the Company's management believes that the
ultimate resolution of these matters, if settled unfavorably to the Company,
could have a material adverse effect on the Company's financial position,
operating results and cash flows. The Company is uninsured for any damages or
costs the Company may incur as a result of this lawsuit, including the expenses
of defending the lawsuit. The Company is vigorously defending its rights in this
action.

The nature of the Company's business exposes it to various types of claims
or litigation against the Company, including, but not limited to, civil rights
claims relating to conditions of confinement and/or mistreatment, sexual
misconduct claims brought by prisoners or detainees, medical malpractice claims,
claims relating to employment matters (including, but not limited to, employment
discrimination claims,

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

union grievances and wage and hour claims), property loss claims, environmental
claims, automobile liability claims, contractual claims and claims for personal
injury or other damages resulting from contact with the Company's facilities,
programs, personnel or prisoners, including damages arising from a prisoner's
escape or from a disturbance or riot at a facility. In addition, our management
contracts generally require us to indemnify the governmental agency against any
damages to which the governmental agency may be subject in connection with such
claims or litigation. We maintain insurance coverage for these types of claims,
except for claims relating to employment matters, for which we carry no
insurance. Except for any potential losses related to the wage and hour matter
described above, we do not expect the outcome of any pending legal proceedings
to have material adverse effect on our financial condition, results of
operations or cash flows.

9. COMMON SHARE PURCHASE

On July 9, 2003 the Company purchased all 12 million shares of the
Company's common stock, par value $0.01, beneficially owned by Group 4 Falck,
the Company's former 57% majority shareholder, for $132 million in cash pursuant
to the terms of a share purchase agreement, dated April 30, 2003, between the
Company, Group 4 Falck, TWC, and Tuhnekcaw, Inc., an indirect wholly-owned
subsidiary of Group 4 Falck (the "Transaction").

Under the terms of the share purchase agreement, Group 4 Falck, TWC and
Tuhnekcaw, Inc. cannot, and cannot permit any of their subsidiaries to, acquire
beneficial ownership of any of the Company's voting securities during a one-year
standstill period beginning July 9, 2003, the closing date of the Transaction.
Immediately following the completion of the Transaction, the Company had
approximately 9.3 million shares of common stock issued and outstanding.

Upon closing of the Transaction, an agreement dated March 7, 2002 between
the Company, Group 4 Falck and TWC, which governed certain aspects of the
parties' relationship, was terminated and the two Group 4 Falck representatives
serving on the Company's board of directors resigned. Also terminated upon the
closing of the Transaction was a March 7, 2002 agreement between the Company and
Group 4 Falck wherein Group 4 Falck agreed to reimburse the Company for up to
10% of the fair market value of the Company's interest in its UK joint venture
in the event that litigation related to the sale of TWC to Group 4 Falck were to
result in a court order requiring the Company to sell its interest in the joint
venture to its partner, Serco Investments Limited ("Serco").

In addition, the services agreement dated October 28, 2002, between the
Company and TWC, terminated effective December 31, 2003, and no further payments
for periods thereafter will be due from the Company to Group 4 Falck. Pursuant
to the services agreement, Group 4 Falck was scheduled to provide the Company
with information systems related services through December 31, 2004. The Company
has been handling those services internally since January 1, 2004.

A sublease for the Company's former headquarters between TWC, as sub
lessor, and the Company, as sub lessee, also terminated ten days after closing
of the Transaction. The Company relocated its corporate headquarters to Boca
Raton, Florida on April 14, 2003.

In April 1994, the Company's Board of Directors authorized 10,000,000
shares of "blank check" preferred stock. The Board of Directors is authorized to
determine the rights and privileges of any future issuance of preferred stock
such as voting and dividend rights, liquidation privileges, redemption rights
and conversion privileges.

10. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in one industry segment encompassing the development
and management of privatized government institutions located in the United
States, Australia, South Africa, and New Zealand.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company operates and tracks its results in geographic operating
segments. Information about the Company's operations in different geographical
regions is shown below. Revenues are attributed to geographical areas based on
location of operations and long-lived assets consist of property, plant and
equipment.

The Company's international operations represent its wholly owned
Australian subsidiaries. Through the Company's wholly owned subsidiary, GEO
Group Australia Pty. Limited, the Company currently manages five correctional
facilities, including a facility in New Zealand and two immigration detention
centers.

Except for the major customers noted in the following table, no single
customer provided more than 10% of the Company's consolidated revenues during
fiscal 2003, 2002 and 2001:

Concentration of credit risk related to accounts receivable is reflective
of the related revenues.

Equity in earnings of affiliates represents the operations of the Company's
50% owned joint ventures in the United Kingdom (Premier Custodial Group Limited)
and South Africa (South African Custodial Management Pty. Limited and South
African Custodial Services Pty. Limited). These entities and their subsidiaries
are accounted for under the equity method.

The Company sold its interest in Premier Custodial Group Limited on July 2,
2003 for approximately $80.7 million and recognized a gain of approximately $61
million. Total equity in the undistributed earnings for Premier Custodial Group
Limited, before income taxes, for fiscal 2003, 2002, and 2001 was $3.0 million,
$10.2 million and $7.6 million, respectively. As of December 28, 2003 and
December 29, 2002, the Company had a note receivable from Premier Custodial
Group Limited of approximately $5.1 and $4.8 million, respectively that bears
interest at 13% and is due December 15, 2017.

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes certain financial information pertaining to
this joint venture as of December 29, 2002 and for the period from December 30,
2002 through the date of sale of the UK joint venture on July 2, 2003 and for
the fiscal years ended December 29, 2002 and December 30, 2001 (in thousands):

South African Custodial Management Pty. Limited and South African Custodial
Services Pty. Limited commenced operations on their first prison in fiscal 2002.
Total equity in undistributed earnings (loss) for South African Custodial
Management Pty Limited and South African Custodial Services Pty. Limited before
income taxes, for fiscal 2003, 2002, and 2001 was $2.1 million, ($2.0) million,
and ($0.7) million, respectively.

A summary of financial data for the Company's equity affiliates in South
Africa is as follows:

11. INCOME TAXES

The United States and foreign components of income before income taxes and
equity income from affiliates are as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes in the consolidated statements of income
consists of the following components:

A reconciliation of the statutory U.S. federal tax rate (35.0%) and the
effective income tax rate is as follows:

The components of the net current deferred income tax asset at fiscal year
end are as follows:

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the net non-current deferred income tax asset at fiscal
year end are as follows:

The exercise of non-qualified stock options which have been granted under
the Company's stock option plans give rise to compensation which is includable
in the taxable income of the applicable employees and deducted by the Company
for federal and state income tax purposes. Such compensation results from
increases in the fair market value of the Company's common stock subsequent to
the date of grant. In accordance with Accounting Principles Board Opinion No.
25, such compensation is not recognized as an expense for financial accounting
purposes and related tax benefits are credited directly to additional
paid-in-capital.

12. EARNINGS PER SHARE

The table below shows the amounts used in computing earnings per share
("EPS") in accordance with SFAS No. 128 and the effects on income and the
weighted average number of shares of potential dilutive common stock.

For fiscal 2003, options to purchase 735,600 shares of the Company's common
stock with exercise prices ranging from $15.40 to $29.56 per share and
expiration dates between 2006 and 2012 were outstanding at December 28, 2003,
but were not included in the computation of diluted EPS because their effect
would be anti-dilutive.

For fiscal 2002, options to purchase 784,600 shares of the Company's common
stock with exercise prices ranging from $14.69 to $26.88 per share and
expiration dates between 2006 and 2012 were outstanding at December 29, 2002,
but were not included in the computation of diluted EPS because their effect
would be anti-dilutive.

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For fiscal 2001, options to purchase 510,000 shares of the Company's common
stock with exercise prices ranging from $13.75 to $26.88 per share and
expiration dates between 2005 and 2011 were outstanding at December 30, 2001,
but were not included in the computation of diluted EPS because their effect
would be anti-dilutive.

13. RELATED PARTY TRANSACTIONS WITH THE WACKENHUT CORPORATION

Related party transactions occurred in the past in the normal course of
business between the Company and TWC. Such transactions included the purchase of
goods and services and corporate costs for management support, office space,
insurance and interest expense.

The Company incurred the following expenses related to transactions with
TWC in the following years:

General and administrative expenses represented charges for management and
support services. TWC previously provided various general and administrative
services to the Company under a Services Agreement, including payroll services,
human resources support, tax services and information technology support
services through December 31, 2002. Beginning January 1, 2003, the only service
provided was for information technology support through year-end 2003. The
Company began handling information technology support services internally
effective January 1, 2004, and no longer relies on TWC for any services. All of
the services formerly provided by TWC to the Company were pursuant to negotiated
annual rates with TWC based upon the level of service to be provided under the
Services Agreement. The Company believes that such rates were on terms no less
favorable than the Company could obtain from unaffiliated third parties.

The Company also leased office space from TWC for its corporate
headquarters under a non-cancelable operating lease that expires February 11,
2011. This lease was terminated effective July 19, 2003 as a result of the share
purchase agreement.

14. STOCK OPTIONS

The Company has four stock option plans: the Wackenhut Corrections
Corporation 1994 Stock Option Plan (First Plan), the Wackenhut Corrections
Corporation Stock Option Plan (Second Plan), the 1995 Non-Employee Director
Stock Option Plan (Third Plan) and the Wackenhut Corrections Corporation 1999
Stock Option Plan (Fourth Plan). All outstanding options vested immediately upon
the Merger.

Under the First Plan, the Company may grant up to 897,600 shares of common
stock to key employees and consultants. All options granted under this plan are
exercisable at the fair market value of the common stock at the date of the
grant, vest 100% immediately and expire no later than ten years after the date
of the grant.

Under the Second Plan and Fourth Plan, the Company may grant options to key
employees for up to 1,500,000 and 550,000 shares of common stock, respectively.
Under the terms of these plans, the exercise price per share and vesting period
is determined at the sole discretion of the Board of Directors. All

73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

options that have been granted under these plans are exercisable at the fair
market value of the common stock at the date of the grant. Generally, the
options vest and become exercisable ratably over a four-year period, beginning
immediately on the date of the grant. However, the Board of Directors has
exercised its discretion and has granted options that vest 100% immediately. All
options under the Second Plan and Fourth Plan expire no later than ten years
after the date of the grant.

Under the Third Plan, the Company may grant up to 60,000 shares of common
stock to non-employee directors of the Company. Under the terms of this plan,
options are granted at the fair market value of the common stock at the date of
the grant, become exercisable immediately, and expire ten years after the date
of the grant.

15. RETIREMENT AND DEFERRED COMPENSATION PLANS

The Company has two noncontributory defined benefit pension plans covering
certain of the Company's executives. Retirement benefits are based on years of
service, employees' average compensation for the last five years prior to
retirement and social security benefits. Currently, the plans are not funded.
The Company purchased and is the beneficiary of life insurance policies for
certain participants enrolled in the plans.

In 2001, the Company established non-qualified deferred compensation
agreements with three key executives providing for fixed annual benefits ranging
from $150,000 to $250,000 payable upon retirement at age 60 for a period of 25
years. In March 2002, both the executives and the Company agreed to amend the
retirement agreements to provide for a lump sum payment at an accelerated
retirement age of 55 and to enter into employment agreements upon a change in
control.

The Merger between TWC and Group 4 Falck triggered change in control
provisions in the three key executives' employment and retirement agreements.
The employment agreements entitle the executives, if they remain employed by the
Company for at least two years following the Merger, to twenty-four consecutive
monthly payments equal, in total, to three times each executive's 2002 salary
plus bonus. The Company paid approximately $3.1 million and $1.8 million related
to the change in control provisions per the employment agreements in 2003 and
2002, respectively. The Company expects to payout approximately $1.3 million
related to the change in control provisions per the employment agreements in
2004.

In addition, the change in control accelerated the executive's eligibility
for retirement from age 60 to 55 and provided for a one-time payment at age 55
to the executive based on the net present value of the benefit, as defined by
the executive retirement agreement. The cost of these revised agreements is
being charged to expense and accrued using a present value method over the
expected remaining terms of employment. The charge to expense for the amended
agreements for 2002 was $3.1 million. Currently, the plan is not funded. In
January 2003, the agreements were amended to defer the retirement payment until
the respective executives actually retire, no sooner than age 55.

The following table summarizes key information related to these pension
plans and retirement agreements which includes information as required by SFAS
132, Employers' Disclosures about Pensions and Other Postretirement Benefits.
The table illustrates the reconciliation of the beginning and ending balances of
the benefit obligation showing the effects during the period attributable to
each of the following: service cost, interest cost, plan amendments, termination
benefits, actuarial gains and losses. The assumptions used in the Company's
calculation of accrued pension costs are based on market information and the
Company's historical rates for employment compensation and discount rates,
respectively.

74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In accordance with SFAS 132, the Company has also disclosed contributions
and payment of benefits related to the plan. There were no assets in the plan at
December 28, 2003 or December 29, 2002. All changes as a result of the
adjustments to the accumulated benefit obligation are included below and shown
net of tax in the Consolidated Statement of Shareholders' Equity and
Comprehensive Income. There were no significant transactions between the
employer or related parties and the plan during the period.

75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has established a deferred compensation agreement for
non-employee directors, which allow eligible directors to defer their
compensation in either the form of cash or stock. Participants may elect lump
sum or monthly payments to be made at least one year after the deferral is made
or at the time the participant ceases to be a director. The Company recognized
total compensation expense under this plan of $0.1 million, $0 and $0.1 million
for 2003, 2002, and 2001, respectively. Payouts under the plan were $0 and $0.1
million in 2003 and 2002 respectively. The liability for the deferred
compensation was $0.5 million and $0.4 million at year-end 2003 and 2002,
respectively, and is included in "Accrued expenses" in the accompanying
consolidated balance sheets.

The Company also has a non-qualified deferred compensation plan for
employees who are ineligible to participate in its qualified 401(k) plan.
Eligible employees may defer a fixed percentage of their salary, which earns
interest at a rate equal to the prime rate less 0.75%. The Company matches
employee contributions up to $400 each year based on the employee's years of
service. Payments will be made at retirement age of 65 or at termination of
employment. The Company recognized expense of $0.1 million, $0.2 million and
$0.3 million in 2003, 2002, and 2001, respectively. The liability for this plan
at year-end 2003 and 2002 was $1.6 million and $1.3 million, respectively, and
is included in "Accrued expenses" in the accompanying consolidated balance
sheets.

16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The Company's selected quarterly financial data for the fiscal years ended
December 28, 2003 and December 29, 2002, is as follows:

The third quarter 2003 results include a pre-tax gain of approximately
$61.0 million for the sale of the UK joint venture (See Note 10), a pre-tax
charge of approximately $5.0 million related to the Jena, Louisiana lease (See
Note 8) and a pre-tax charge of approximately $2.0 million related to the
write-off of deferred financing fees from the extinguishment of debt. Earnings
per share for the third and fourth quarter of 2003 reflect lower weighted
average shares outstanding due to the purchase of the 12,000,000 shares from
Group 4 Falck in July 2003 (See Note 1).

76

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Shareholders
The GEO Group, Inc.

We have audited the accompanying consolidated balance sheets of The GEO
Group, Inc. (formerly Wackenhut Corrections Corporation) as of December 28, 2003
and December 29, 2002, and the related consolidated statements of income, cash
flows and shareholders' equity and comprehensive income for each of the years
then ended. The consolidated statements of income, cash flows and shareholders'
equity and comprehensive income of the Company for the year ended December 30,
2001 were audited by other auditors who have ceased operations and whose report
dated February 6, 2002 expressed an unqualified opinion on those statements. Our
audits also included the 2003 and 2002 financial information included in the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The GEO Group,
Inc. at December 28, 2003 and December 29, 2002, and the consolidated results of
its operations and its cash flows for each of the years then ended, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related 2003 and 2002 financial information included
in the financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, effective
December 31, 2001, the Company changed its method of accounting for goodwill and
other intangible assets.

As discussed above, the consolidated statements of income, cash flows and
shareholders' equity and comprehensive income of the Company for the year ended
December 30, 2001 were audited by other auditors who have ceased operations. As
described in Note 2, these financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
(Statement) No. 142, Goodwill and Other Intangible Assets, which was adopted by
the Company as of December 31, 2001. Our audit procedures with respect to the
disclosures in Note 2 with respect to 2001 included (a) agreeing the previously
reported net income to the previously issued financial statements and the
adjustments to reported net income representing amortization expense (including
any related tax effects) recognized in those periods related to goodwill and
goodwill related to equity investees to our underlying records obtained from
management, and (b) testing the mathematical accuracy of the reconciliation of
adjusted net income to reported net income, and the related earnings-per-share
amounts. In our opinion, the disclosures for 2001 in Note 2 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 consolidated financial statements of the Company other than with respect to
such disclosures and, accordingly, we do not express an opinion or any other
form of assurance on the 2001 consolidated financial statements taken as a
whole.

/s/ ERNST & YOUNG LLP

West Palm Beach, Florida
February 4, 2004

77

THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE
REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR ANDERSEN LLP
PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS FORM 10-K.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To Wackenhut Corrections Corporation:

We have audited the accompanying consolidated balance sheets of Wackenhut
Corrections Corporation (a Florida corporation) and subsidiaries as of December
30, 2001 and December 31, 2000, and the related consolidated statements of
operations, stockholders' equity and comprehensive income and cash flows for
each of the three fiscal years in the period ended December 30, 2001. These
financial statements are the responsibility of our management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wackenhut Corrections
Corporation and subsidiaries as of December 30, 2001 and December 31 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 30, 2001 in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 2 to the financial statements, effective January 1,
2001, the Company changed its method of accounting for derivative instruments.

ARTHUR ANDERSEN LLP

West Palm Beach, Florida,
February 6, 2002

78

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

To the Shareholders of
The GEO Group, Inc.:

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
They include amounts based on judgments and estimates.

Representation in the consolidated financial statements and the fairness
and integrity of such statements are the responsibility of management. In order
to meet management's responsibility, the Company maintains a system of internal
controls and procedures and a program of internal audits designed to provide
reasonable assurance that our assets are controlled and safeguarded, that
transactions are executed in accordance with management's authorization and
properly recorded, and that accounting records may be relied upon in the
preparation of financial statements.

The consolidated financial statements have been audited by Ernst & Young
LLP, independent certified public accountants, whose appointment was ratified by
our shareholders. Their report expresses a professional opinion as to whether
management's consolidated financial statements considered in their entirety
present fairly, in conformity with accounting principles generally accepted in
the United States, our financial position and results of operations. Their audit
was conducted in accordance with auditing standards generally accepted in the
United States. As part of this audit, Ernst & Young LLP considered our system of
internal controls to the degree they deemed necessary to determine the nature,
timing, and extent of their audit tests which support their opinion on the
consolidated financial statements.

The Audit Committee of the Board of Directors meets periodically with
representatives of management, the independent certified public accountants and
our internal auditors to review matters relating to financial reporting,
internal accounting controls and auditing. Both the internal auditors and the
independent certified public accountants have unrestricted access to the Audit
Committee to discuss the results of their reviews.

George C. Zoley
Chairman and Chief Executive Officer

Wayne H. Calabrese
Vice Chairman, President
and Chief Operating Officer

John G. O'Rourke
Senior Vice President
Chief Financial Officer and Treasurer

79

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Securities Exchange Act Rule
13-a-14(c) and 15d-14(c). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedure, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e),
as of the end of the period covered by this report. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that, as
of December 28, 2003, our disclosure controls and procedures were effective in
timely alerting them to material information relating to us (including our
consolidated subsidiaries) required to be included in this report. There has
been no change in our internal control over financial reporting during the year
ended December 28, 2003 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

PART III

ITEMS 10, 11, 12, 13 AND 14

The information required by Items 10, 11, 12 (except for the information
required by Item 201(d) of Regulation S-K which is included in Part II, Item 5
of this report), 13 and 14 of Form 10-K will be contained in, and is
incorporated by reference from, the proxy statement for our 2004 annual meeting
of shareholders, which will be filed with the SEC pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) Financial Statements.

The following consolidated financial statements of GEO are filed under Item
8 of Part II of this report:

Report of Independent Certified Public Accountants -- Page 77

Consolidated Balance Sheets -- December 28, 2003 and December 29,
2002 -- Page 49

Consolidated Statements of Income -- Fiscal years ended December 28, 2003,
December 29, 2002, and December 30, 2001 -- Page 48

Consolidated Statements of Cash Flows -- Fiscal years ended December 28,
2003, December 29, 2002, and December 30, 2001 -- Page 50

Consolidated Statements of Shareholders' Equity and Comprehensive
Income -- Fiscal years ended December 28, 2003, December 29, 2002, and December
30, 2001 -- Page 51

Notes to Consolidated Financial Statements -- Pages 52 through 76

(2) Financial Statement Schedules.

Schedule II -- Valuation and Qualifying Accounts -- Page 87

All other schedules specified in the accounting regulations of the
Securities and Exchange Commission have been omitted because they are either
inapplicable or not required.
80

(3) Exhibits Required by Item 601 of Regulation S-K. The following
exhibits are filed as part of this Annual Report:

- ---------------

* Filed herewith.
+ Management contract or compensatory plan, contract or agreement as defined in
Item 402(a)(3) of Regulation S-K.

(b) Reports on Form 8-K.

We filed a Form 8-K, Items 5 and 7, on October 27, 2003.

We filed a Form 8-K, Item 5, on October 30, 2003.

We filed a Form 8-K, Item 12, on November 7, 2003.

We filed a Form 8-K/A, Item 12, on November 18, 2003

83

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

THE GEO GROUP, INC.

/s/ JOHN G. O'ROURKE
--------------------------------------
John G. O'Rourke
Senior Vice President of Finance &
Chief Financial Officer

Date: March 10, 2004

Each person whose signature appears below hereby constitutes and appoints
John G. O'Rourke, Senior Vice President of Finance and Chief Financial Officer;
Brian R. Evans, Chief Accounting Officer, and Controller; and John J. Bulfin,
Senior Vice President, General Counsel and Corporate Secretary; and each of
them, the true and lawful attorneys-in-fact and agents of the undersigned, with
full power undersigned, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.

85

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE
REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR ANDERSEN LLP
PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS FORM 10-K.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To Wackenhut Corrections Corporation:

We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements included in Wackenhut
Corrections Corporation's 2001 Annual Report to Shareholders included in this
Form 10-K, and have issued our report thereon dated February 6, 2002. Our audits
were made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed above in item 14(a)2 of our Annual Report on Form
10-K for the fiscal year ended December 30, 2001 is the responsibility of our
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

West Palm Beach, Florida,
February 6, 2002.

86

SCHEDULE II

THE GEO GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 28, 2003, DECEMBER 29, 2002, AND DECEMBER
30, 2001

87

EXHIBIT INDEX

- ---------------

* Filed herewith.
+ Management contract or compensatory plan, contract or agreement as defined in
Item 402(a)(3) of Regulation S-K.